Where is the price of oil heading

The price of oil is one of the most important economic factors in the modern global economy. This is largely due to mankind's dependence on the substance to provide cheap energy.

Over the past year the price of oil has been extremely volatile, especially last summer when the price per barrel tripled to $147.50, which, in turn pushed the price of petrol up to £1.20 in the UK. As we enter the summer period is the price likely to spike again?

It is important to understand that there are various factors that affect the demand and supply of oil in global markets; these bring about fluctuations in the price on a daily basis. Over recent months the price of oil has started to rally off its lows of $32.40, this is slightly enigmatic, because there is still a large amount of downside pressure on the price of oil. The global financial crisis has affected the consumption of oil globally; this should add downwards pressure to the market. Combined with the high amount of reserves held by the industrialised nations such as the UK and the US; this should give further downside pressure to oil prices.

Another major factor is the amount of oil in the market and this is determined by the Organisation of Oil Produces Countries (OPEC). OPEC is to all intents and purposes an international cartel that includes such countries as Saudi Arabian, Iran and Venezuela. The purpose of this cartel is to protect the interests of member nations by controlling the production of oil, they do this by setting quotas on how much oil they take out of the ground, this gives them a large amount of control over the price of oil. In recent months they have cut production to try and increase the price of oil, with their target being in the region of $65-80 dollars a barrel.

There has also been an escalation of trouble in the OPEC member Nigeria. There have been countless clashes between the Nigerian government troops and rebel group in the area. The rebel group is fighting for fair redistribution of their natural resources and uses standard guerrilla tactics to strike oil pipelines and pumps. Nigeria is the 5th biggest exporter to the US; with uncertainty in the nation this is adding upward pressure to oil prices.

Last year, when the price of oil was heading towards it peak, there was a lot of talk about speculation within the oil market by international traders and hedge funds. There are initial signs that traders and hedge funds are beginning to speculate again as a simple hedge against potential inflation. Speculation on oil futures creates significantly unpredictable prices and much of OPEC's efforts to manage production may once again be in vein.

Should we see a surge in prices and continued volatility, the oil and commodity investment markets are likely see much tighter regulation from the international community.

With the intervention of the international community and sensible production from OPEC, the price of oil should be relatively stable and it is reasonable to expect the market to remain within the price range targeted.

www.sterlingfs.co.uk