Oil prices have become daily headlines, and oil continues to affect the global economy, usually indicating its overall health status. The current high price of WTI - above $78 per barrel - provides evidence of global geopolitical instability, which began a year ago when the outbreak of the Russia Ukraine war pushed oil prices to almost $140, setting a new high in nearly 14 years. However, low oil prices do not always indicate the flourishing development of the global economy. When the world experienced the financial crisis and the outbreak of the 2008 Great Depression, oil prices fell to a historic low of $41.64 per barrel. If oil prices skyrocketed during periods of political and economic turmoil, are there other factors that more clearly affect their prices?

Oil prices also have other driving factors - the supply and demand relationship in the market, the cost of extracting and producing oil, the decisions of OPEC countries, and investor sentiment. These factors have not yet accurately determined the price of oil. Oil tanks always bring surprises to the world, no matter how powerful these traditional influences may be.

Taking supply and demand factors as an example. You would think that the supply to demand ratio directly affects oil prices. Economists call it the law of demand. They say that when demand increases or supply increases, it decreases, and the cost of goods increases. Alternatively, when demand decreases or supply increases, prices decline. The retail price of ice cream provides convincing examples.

Statista shows that the price in 2023 is $5.56 for 1/2 gallon ice cream in the United States. Assuming you can give yourself a gallon of ice cream at this price every day. If the retailer agrees to sell 1/2 gallon ice cream for $6.56, you may limit yourself to half a gallon. However, if they start selling ice cream at the 2006 price of $3.90, you may eat a gallon and a half a day. Although the law of demand makes it unclear how ice cream is related to oil prices.

The problem is that oil prices are set in the oil futures market. The futures market is an auction market in which market participants buy and sell commodities and futures contracts for delivery on specified future dates. An oil futures contract is a binding agreement that grants investors the right to purchase oil in barrels at a predetermined price on a pre-defined date in the future. After the buyer and seller sign the oil futures contract, they must fulfill their transactions on the specified date in the contract. Oil traders are divided into two categories - hedgers and speculators - and have the ability to influence oil prices, regardless of oil supply and demand when they trade.

In fact, large financial institutions, hedge funds, pension funds, and other investment funds tend to invest billions of dollars into the energy commodity market. Research has shown that in the past few years, they have invested up to $60 billion in US oil futures markets to leverage changes in oil prices or hedge against them. Most of the additional investment comes from investment funds that do not use oil as part of their business. Therefore, they participated in speculation, according to the Commodity Futures Trading Commission (CFTC).

Speculators do not produce or use oil but risk trading oil futures capital to profit from price changes. The report shows that some speculators have earned hundreds of millions of dollars over the past few years by trading oil futures. However, being wealthy is only part of the problem. The large purchase of crude oil by speculators in oil futures contracts has created additional demand for oil, pushing up its prices. In terms of the energy commodity market, the demand for a barrel of oil comes from speculators purchasing futures contracts as much as the demand for barrels. Refiners or oil users actually purchase futures contracts. As speculators, one can artificially manipulate oil demand without affecting demand or the fairness and predictability of supply oil prices. The factors of demand and supply reflect that people's greed and cunning are greater than the actual demand for oil in the world.

The supply and demand forces cannot fully consider the rise in oil prices. Indeed, global demand for oil has been growing due to China's rapid industrialization, India's strength, and people's desire for refined oil. However, even with a surge in global oil demand, global oil supply further increases due to the possession of global oil inventories. According to the latest statistics, the level of oil inventory in the United States is 851.79 million, from 850.62 million last week. Meanwhile, over time, oil prices are also rising. As of the writing of this article, oil has expanded its gains for the third day, trading above $78 per barrel, suggesting that the Federal Reserve may suspend interest rate hikes for the summer amid signs of China's rebound and fresh signs. These numbers fully demonstrate that the supply and demand of the market are indeed not as clearly determined as the surface of oil prices appears.