The Brent crude oil is a sweet light crude oil that is used as a major price benchmark for oil worldwide. However, it isn’t as sweet as the WTI crude oil. But still, it is the leading global price benchmark for Atlantic basin crude oils. As a matter of fact, it is used to price two-third of the world’s internationally traded crude oil supplies.
Due to its huge stature in the crude oil market, Brent crude oil prices are influenced by a host of factors. These factors influence the price of just about any crude oil blend. However, because it’s a benchmark, it tends to be more sensitive to these factors than other crude oil blends. Another thing to note is that these factors are important only because they influence the demand and supply dynamics of crude oil.
Geopolitical and economic factors
Case in point is the Iraqi wars and unrest in the Middle East. Iraq is a major oil producer, and any event posses threat to several economic activities, including oil production and exportation can have far reaching implications on the price of all oil commodities. For example in June 2014 traders feared that the Sunni insurgency would hinder Iraq from exporting oil, which would potentially affect worldwide oil supplies, thereby, potentially making oil demand higher than supply. This fear resulted in market activities that drove oil prices high or a short period of time.
However, the Iraq crises didn’t alter oil exports from Iraq in reality, just the price. For the most part, oil price movement here is a result of the market psychology. The takeaway from here is that any geopolitical event that poses threat to oil supplies from a major supplier would most certainly drive oil prices high.
As for the economy, it should be expected that strong economic growths would drive oil prices upward to some extent. The belief is that a strong economy would increase the demand for crude oil. On the other hand, an economic crisis would lead to a decline in oil prices. The belief here is that the economy is not even strong enough to need more oil. This is evident during the last global recession when oil prices fell by about five folds. This can be seen on the chart above. However, while the reality of economic changes has huge effect on oil prices, speculations about economic strengths can also influence oil prices. For instance, if analysts come up with predictions of a recession today, you can expect that oil prices would dip.
Just like the WTI crude oil, OPEC supplies also influence Brent crude oil prices. A reduction in OPEC production target is likely to drive Brent crude prices high. OPEC’s decisions are so important in the oil market because OPE C owns about two-third of the global oil market. So traders of Brent crude might want to keep tabs on OPEC’s decisions to help the process of predicting Brent crude oil prices.
Supplies outlook from individual OPEC members also have the potential to affect oil prices. For instance, the current price decrease that the oil market is seeing is partly because Libya is prepared to resume exports from two ports that had been previously closed – as reported by Reuters. While the actual export is yet to begin, the effect is already evident in Brent crude prices. This move causes a change in the way traders look at the supply spectrum of crude oil. Moreover, the chart below from the EIA, further explains why this development from Libya has so much effect on the oil market.
When supplies were first cut off from Libya, Brent crude oil prices dipped. Now that supplies are about to be restored, Brent crude prices is surging again. The same trend would be witnessed with most OPEC members.
Historically, environmental hazards have affected oil prices, as it changes the supply dynamics of the commodity. Environmental hazards range from earthquake to hurricanes to oil spillages. These events have the potential to stall oil production, which ends up making traders think that there would be a supply shortage. In most cases, the effect that such events have on the oil market is usually bigger than they should be. That is because traders usually react excessively to events. So the change in prices might not tell the whole story about the severances of the event.
WTI crude oil prices
Due to the fact that WTI and Brent crude oils are both benchmarks, there is a correlation in their prices historically.
As the chart above shows, for the period up to around 2005 the Brent-WTI spread was quite stable, and was close to zero. It means that the deference in the prices of the two crude oil blends was not wide. This also indicates that the prices of the two crude oil blends move closely. While this trend hasn’t quite been true in recent years, the fact that it has been true for decades means that this should be taken seriously. Moreover, it’s gradually moving back to zero levels, where it used to be. So, in general, the price movement of the WTI crude oil provides a basis for predicting the direction of Brent crude oil.
As you can see, many factors affect the price of Brent crude oil. The key to predicting oil prices correctly lies in your ability to weigh the extent to which each event can affect the global oil market per time. I mean, you should understand that some factors would have more effects than other factors. Here is a simple trick. In the short term, the higher the noise that is being made about an event, the higher its effect would be on Brent crude oil prices.