There are many fundamental factors that influence crude oil prices, including the relationship between supply and demand and fluctuations in the USD. Notably, crude oil prices are highly sensitive to global geopolitical events, especially in key production regions.

Supply and demand are among the most important factors affecting the prices of most commodities, and crude oil is no exception. Information on crude oil supply and demand can be found in regular reports from the U.S. Energy Information Administration (EIA), OPEC's monthly crude oil reports, or from other organizations such as Baker Hughes or the American Petroleum Institute (API). The impact of these two factors can be summarized in the matrix below:

Source: Principles of Macroeconomics

Regarding supply, crude oil production from the Organization of the Petroleum Exporting Countries (OPEC) accounts for 40% of the world's oil production. This organization sets production targets or quotas for its members. Historically, oil prices tend to rise when OPEC's production targets decrease. On the other hand, due to its large market share, any forecast or action by the group can significantly impact global oil prices. Notably, signals of change often come from Saudi Arabia, the largest producer among OPEC members. Later, OPEC, along with another alliance led by Russia—another major crude oil producer—formed what is known as OPEC+.

Production from non-OPEC countries is also significant, accounting for 60% of the world's oil production. Major production centers include North America, regions of the former Soviet Union, and the North Sea. These producers are generally price-takers, rarely attempting to influence prices.

Source: EIA

Regarding demand, one can observe the countries belonging to the Organization for Economic Cooperation and Development (OECD), including the U.S., Europe, and other industrialized nations, which accounted for 46% of global crude oil consumption in 2001. The relationship between oil prices, economic growth, and oil consumption varies depending on the economic structure of each country.

However, these OECD countries consume less oil compared to non-OECD countries, which have a higher proportion of manufacturing industries in their economies and therefore use more energy than developed nations that are more service-oriented. China is a prime example; its strong economic growth has made it the largest energy consumer and the second-largest oil consumer in the world. Moreover, China's increasing oil consumption is a major driver of global oil consumption growth.

For traders, the weekly inventory figures from the EIA are also crucial data to monitor. Every Wednesday, this agency releases detailed reports on refinery activity, inventory levels, imports, and more. Information from the EIA consistently causes fluctuations in oil prices.

The strength of the USD (measured by the DXY) is another factor that impacts oil prices. This is because crude oil prices are denominated in USD globally. A stronger U.S. dollar tends to put downward pressure on USD-based assets like crude oil; conversely, a weaker dollar pushes prices higher. The underlying reason is that a cheaper dollar makes crude oil more attractive to foreign consumers, thereby increasing demand for the product. On the other hand, a stronger USD also enhances the appeal of investing in crude oil contracts for investors.

The fluctuations of the USD can be influenced by key economic data such as the U.S. non-farm payrolls (NFP), which includes the unemployment rate and the number of jobs in businesses across the country. A positive NFP report, such as an increase in employment, a decrease in the unemployment rate, and growth in average income, will typically strengthen the USD, reflecting investor optimism about the economy. Additionally, the Federal Reserve's interest rate decisions also impact the value of the USD.

Source: MacroMicro

Crude oil prices are also closely tied to geopolitics and international relations. Therefore, it is essential to monitor the state of relations between different countries, as well as the overall stability and prosperity of key production and consumption regions. Any news from these areas has the potential to disrupt the balance between supply and demand and alter oil prices.

The Iran-Iraq war in the 1980s is an example of how supply can decrease due to conflict, marking a period when supply and demand shifted due to international relations in a major oil-producing region. Internal conflicts, such as unrest in Nigeria's oil-producing regions or the civil war in Libya, can have similar effects. Geopolitical disputes between major oil producers and consumers can also reduce supply. After Russia attacked Ukraine in 2022, the U.S. imposed sanctions on Russian oil, which reduced supply and led to higher overall oil prices.

Conflicts in the Red Sea also affect oil prices, as this is a crucial route for global crude oil supply. Such conflicts can extend transportation time and increase costs, weakening the market's ability to handle potential future supply disruptions.

On the other hand, tensions between the U.S. and China are closely monitored. Any disputes between these major crude oil consumers can negatively impact the global economy's health and reduce overall demand. Additionally, U.S. elections are also closely watched to understand the elected candidate's stance on renewable energy and fossil fuels.

Trading activities in the financial markets also influence oil prices because one of the roles of the futures market is price discovery. The market sees participation from various entities with different motives, and even within these entities, there are varying objectives. Banks, hedge funds, commodity trading advisors (CTAs), and other money managers are typically not interested in trading physical oil; their primary goal is to profit from price changes. This, in turn, also helps increase market liquidity.

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