The Critical Value Of Crude Oil

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Final Project: Forecasting – Crude Oil The Critical Value of Crude Oil Prices Oil is the world economy’s most important source of energy and is therefore critical to economic growth. At its most basic level, the supply of crude oil is determined by the ability of oil companies to extract reserves from the ground and distribute them around the world. Its value is driven by demand for refined petroleum products, particularly in the transportation sector. Petroleum products power virtually all motor vehicles, aircraft, marine vessels, and trains around the globe. In total, products derived from oil, such as motor gasoline, jet fuel, diesel fuel, and heating oil, supply 33% of all the energy consumed by households, businesses,…show more content…
Crude oil prices have evolved in multiple ways over time, varying between being stable, trending upwards and falling abruptly. Major movements in oil prices can be largely explained by changes in oil supply, oil demand and oil inventories. As such, it is of value to consider these key variables as those of economic trends to contain information on future oil price developments and forecasting. In context to Cao, M. D., Bauer, L., Purohit, P. K., & Faseruk, A (2015); “A crude oil futures contract is an agreement to buy or sell a specified amount of crude oil at an agreed upon future date at an agreed upon price and location. Unless offset, the parties are obliged to complete the agreed transaction at the expiration date. Market expectation, therefore, is reflected in the futures market where buyers and sellers fix future prices corresponding to the delivery times. Apart from providing much needed liquidity, large international futures markets also serve as price centers to worldwide traders as a whole. While less than three per cent of futures contracts result in the delivery of crude oil, futures remain an indicative benchmark of market expectation. Participants in the futures market in general are hedgers (commercial) and speculators (noncommercial) who are distinguished by their exposures to the physical crude oil
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