Crude oil prices have increased dramatically in
recent years. West Texas Intermediate (WTI) prices, which remained
around $20 per barrel during the 1990’s, rose, on average, from about
$31 per barrel in 2003 to $57 per barrel in 2005, and to $66 per barrel
in 2006. In 2007, WTI crude oil prices have climbed further, to average
over $85 per barrel in October, topping $90 per barrel at the end of the
month. The EIA believes that the following supply and demand
fundamentals are the main drivers behind recent oil price movements:
- Strong world economic growth driving growth in
oil use,
- Moderate non-Organization of the Petroleum
Exporting Countries (OPEC) supply growth,
- OPEC members’ production decisions,
- Low OPEC spare production capacity,
- Organization for Economic Cooperation and
Development (OECD) inventory tightness,
- Worldwide refining bottlenecks, and
- Ongoing geopolitical risks and concerns about
supply availability.
Oil markets have been drawing increased interest and
participation from investors and financial entities without direct
commercial involvement in physical oil markets. The role of these
non-commercial futures market participants in recent price developments
is difficult to assess, particularly over short time intervals.
However, general principles favor a focus on fundamentals rather than
consideration of alternative price drivers, when the explanatory power
of fundamentals is high. As outlined below, EIA believes that
fundamentals provide the primary explanation for the recent trend in oil
prices.
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