The Non-Fundamental Effect of Oil Prices

The Non-Fundamental Effect of Oil Prices

The spectacular fall of crude oil prices in 2008 and 2014 has given rise to widespread discussion of underlying factors contributing to the sharp price changes as well as the desirability or harm of the low prices in the consumers’ and industry’s long-term interest. Javan and Vallejo (2016) point out that there has been a rethink of demand and supply being the only factors that determine oil prices. Chandrashekhar (2016) is of a similar opinion, stating that there are additional factors other than the demand-supply fundamentals that can help explain the current price situation. Chandrashekhar (2016) states that these factors are non-fundamental in nature and include currency movements, geopolitical developments, monetary policy, and speculation. In terms of currency movements, the weakening and strengthening of the dollar and other major currencies in the world has often been accompanied by changes in crude oil prices. Monetary policies such as quantitative easing have also shown to have an indirect impact on oil prices.

Out of the four non-fundamental factors mentioned by Chandrashekhar (2016), I think geopolitical developments have the greatest impact on prices. Geopolitical instabilities in the regions that produce oil makes it quite difficult for the oil production process to take place. The increased geopolitical tension in the Middle East has in the past been accompanied by a sharp increase in the oil prices given the shortage in supply (Chandrashekhar, 2016). Geopolitical tensions, in combination with a couple of non-fundamental factors, also create an ideal ground for speculative capital to come in. The increased flow of speculative capital results in an exaggerated impact on the prices of oil. In the recent past, the relatively lower oil prices can be attributed to the significant easing of geopolitical tensions in the major oil-producing regions of the world. Less tension means that buyers no longer have to pay the “risk premium.”


Chandrashekhar. C (2016). Non-fundamental factors drag crude oil prices. Retrieved from: factors-drag-crude-oil-prices/article6670319.ece

Javan, A., & Vallejo, C. (2016). Fundamentals, non‐fundamentals and the oil price changes in 2007–2009 and 2014–2015. OPEC Energy Review, 40(2), 125-154.