Oil is a commodity, which means that it can be bought and sold in a way similar to stocks or bonds. However, unlike these investments, commodities are subject to greater fluctuations in price because they can be affected by a wider range of factors.
Aside from the push and pull of physical supply and demand in spot markets, the price of crude oil can also be influenced by activity in financial markets for energy derivatives. These markets allow non-commercial participants to trade in large volumes that can shift prices without impacting supply or demand directly. As a result, these traders can distort market signals by creating price movements that diverge from those rooted in fundamentals.
Oil price fluctuation is a global concern that can impact the macroeconomy in many ways. For instance, a positive shock to the oil price can cause production costs to rise – with at least some of the increased prices being passed on to consumers in the form of higher gasoline and electricity prices. This can slow economic growth and affect macroindicators like employment, inflation and public accounts.
On the other hand, persistently low oil prices can make it difficult for central banks to pursue monetary policies aimed at supporting growth and combatting deflationary pressures. Additionally, lower oil prices can reduce companies’ interest in investing in new projects and may lead to a reduction in capital spending overall. This could negatively impact economies, particularly those in the developing world relying on oil exports as their main source of income.