Oil and gas investors look for specific economic indicators to help them understand future movements in the petroleum industry. Like any commodity market, oil and gas companies, and petroleum futures are sensitive to inventory levels, production, global demand, interest rate policies, and aggregate economic figures such as gross domestic product.
- As produced commodities, oil and gas markets are driven by supply and demand as well as the cost of extracting, producing, and refining these natural resources.
- Investors should look to inventories and refining capacity to see if supply is increasing faster than demand, which could lead to downward price pressure (or vice-versa).
- In addition to supply-side metrics, demand for oil can be tracked by looking at economic growth, transportation, and gasoline consumption trends.
- Government policies on taxes, tariffs, interest rates, and regulation can also factor in to oil and gas prices.
Oil is an economically and strategically crucial resource for many nations. Countries like the United States maintain large reserves of crude oil for future use. The measure of these oil reserves acts as an indicator for investors; changes in the stock levels of oil are reflections of trends in production and consumption.
The Energy Information Administration provides a weekly supply estimate of petroleum and other liquids. When the trendline increases over time, suppliers are likely to lower prices to entice more purchases. The opposite is also true; decreasing levels of production cause buyers to bid up the price of petroleum commodities.
Refinery Use and Production
Along with the release of crude inventories comes a long list of data focused on crude oil production, covering domestic production, refinery input, and utilization, and other inventory levels (motor gasoline) as well as import/export data. All of this data is taken into consideration when attempting to gain an idea of the fundamentals of the crude oil market. For example, traders will look at refinery use to determine how much more capacity is available to get additional supply to the market. If refinery use is high, putting additional oil through refineries would be difficult – leading to lower supply and higher prices.
Investors should keep an eye on the ratio between refinery use and refinery capacity. Refineries are expensive, and it can take a long time to significantly increase production capacity beyond current levels. If demand grows to the point that the refinery is maximized, it may lead to higher prices until capacity can be increased.
Global Demand and Economic Performance
Economic development in highly populated nations, such as India and China, may lead to a large rise in global demand for oil and gas products. Alternatively, economic struggles tend to reduce the demand for petroleum as businesses scale back their operations, and individual households cut back on gasoline use to save money. A clear example of this was the Great Recession in 2007-2009 when oil and gas prices dropped approximately 40% in less than six months.
Aggregate indicators of general economic performance can inform investors about expected shifts in the demand for oil and gas. Gross domestic product (GDP) is a measure of the total levels of spending and production in a given economy, and it is assumed that increases in GDP lead to increases in demand for oil.
Government Policy: Interest Rates, Taxes, and Regulation
Interest rates are important economic indicators for sectors related to commodities or finance. Changes in interest rates affect the costs of inventory storage, affect the borrowing and spending habits of both producers and consumers, and change the capital costs and structure for petroleum producers with regards to land, buildings, machinery, and equipment.
Government tax policies impact business performance and profitability. Increased taxation on petroleum products or oil and gas companies restrict output and may lead to rising prices; the opposite is true for lower taxes.
Regulation is also an important aspect to take into consideration. Since the burning of fossil fuels leads to environmental concerns, governments may feel the need to increase their taxes or regulations on oil and gas companies to lower consumption levels intentionally; this affects supply and demand and consequently the price.
(For more information on related economic indicators, see Commodity Prices And Currency Movements, Getting A Grip On The Cost Of Gas and What is the relationship between oil prices and inflation?)