Energy Supply and Demand: Understanding What Drives Oil and Gas Prices

Most consumers get a regular insight into oil and gas prices when they fill up their car or receive their energy bill but if you are an investor, you want to understand what is driving prices and anticipate futures moves so that you can adjust your portfolio accordingly.

Here is a look at the fundamental aspects that help to influence and drive oil and gas prices in either direction. There is an overview of how inventories play their part, an insight into how shale production has reshaped the industry, what drives home heating costs, and a look at some other factors that could influence prices.

Inventory levels and weather

Supply and demand issues are always a factor to consider when you are looking at reasons why gas and oil prices rise and fall but it is not always as simple as that.

It is fair enough to suggest that the expectation of a cold winter period ahead could drive natural gas prices up with the anticipation of higher demand for supply, but inventory levels will also help dictate what price suppliers can demand for their energy.

If you are an active oil and energy investor you will want to keep a close eye on inventory levels published by the Energy Information Administration (EIA) which breaks down the various inventories into regions.

This regular data update from the EIA allows you to see which regions have experienced an increase or decrease in their stock levels and as falling inventories tend to drive prices higher and prices fall when inventory levels are up, this can be key information when trying to make an informed prediction.

Blame shale for the oil price

If you want to point the finger at anybody and suggest a principal reason why oil prices have been depressed for so long in comparison to the halcyon days of $100 per barrel and above, many analysts suggest you should pin the blame on the US shale oil boom.

Even attempts by OPEC to try and restrict output as a way of shoring up the oil price have had little impact and it is likely that a sustained recovery can only be anticipated if sustained cuts in production are achieved and a spike in demand works to rebalance the market.

It is hard to have much optimism for that scenario when you look at US oil output and see that it is firmly on a downward trajectory despite rising production in the Gulf of Mexico attempting to bring some equilibrium.

US crude oil production actually rose between 2008 and early 2015, but since then it is down annually by about 5%. This could help turn the tide and push prices up if inventory levels fall, but some feel that it would take a brave investor to suggest that even a significant supply deficit is going to push oil prices back up to their previous highs.

A healthy appetite for shale is definitely one factor that is influencing crude oil prices and suppliers do sometimes appear to be stuck in the headlights wondering what to do next in order to return oil prices to previous levels.

Closer to home

If you are relying on heating oil to warm your home, you might wonder why prices tend to fluctuate at certain times.

During a period of stability with crude oil prices, you are likely to see a rise in home heating oil prices during the winter months. This is easily explained by the fact that demand is understandably higher during this cold period when homeowners will be firing up the furnace to keep their place at a decent temperature.

A typical home would use a marginal amount of oil during the spring-summer period but as fall and winter come around that consumption figure will rise dramatically. This seasonal demand issue helps to temporarily hike prices, although competition can often help to keep those increases within an acceptable range.

Many different factors

It is too simplistic to pinpoint supply and demand issues as the main driver for energy price fluctuations.

There are numerous other factors that can have a major impact on prices such as political tensions, natural disasters, and changes in policy that will have an impact on production output.

If you are trying to second-guess where prices are headed you could do worse than keep a close eye on inventory levels as well as doing your research on industry developments, as these factors could help you reach an opinion that pays off if you are an energy investor as well as a consumer.

Shane Otwell writes about the economy and investment matters, whether you’re just starting out or already have experience under your belt.