Crude oil and refined product are traded on the open market. This section explains some of the factors that drive changes in crude oil and refined product prices. Increasing demand for crude oil and refined product The demand for crude oil and refined products is increasing, particularly in China and India. Limits in global oil refining capacity In order to try meet the growing demand for refined products, refineries around the world are now running at near full capacity. Looking to the future, new refineries will need to be built to continue to meet demand. A key factor in the development of new refineries is the significant investment required to build and operate them, which is also increasing due to more stringent environmental standards globally, both in terms of environmental performance at refineries and cleaner fuels. Security of crude oil supply Political instability in the Middle East continues to cause uncertainties around crude oil availability and has a significant impact on crude oil price volatility. Unpredictable / extreme weather events Extreme weather events, such as hurricanes in the US can temporarily reduce global refining capacity. Such reductions and speculation about availability of refined products have caused volatility in refined product prices globally. Seasonality Effects Refined product prices are influenced by the seasonal change in demand for specific refined products in the major markets of the northern hemisphere, such as the US, Europe and Japan. In the northern hemisphere winter, the demand for diesel and kerosene to heat homes and offices increases; in the summer the demand for gasoline increases since people tend to drive more. Market Speculation Crude oil and refined product are traded on the open market and are therefore subject to market speculation, which impacts prices. In recent years, there has also been new entrants and increased interest in the oil commodities market, mainly from investment funds and hedge fund managers. It is widely believed that this has added to the volatility of oil prices. Currency Fluctuations The world’s major crude oil and refined product market is traded in US Dollars. Therefore, any change in the exchange rate between a country’s currency and the US Dollar will have an impact on the cost of purchasing crude oil or refined product.
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