Everyone Is Talking About the Price of Oil… But What Exactly Is This?
Everyone is talking about the price of oil right now, especially with the Iran war driving it up. But what does the “price of oil” even mean? And who actually sets it?
When you hear “Oil is $105 per barrel,” that’s not a universal price for all oil or oil products. Right now, for instance, different gas stations around the world charge different prices for gasoline.
Gasoline is one of the products made from crude oil distillation, with some additives thrown in. Distillation is what occurs in oil refineries where crude oil (the glop that comes out of the ground, the “bubbling crude” from the Beverly Hillbillies) is treated with heat and chemicals to create usable products.
Actually, there are vast multitudes of products based on oil distillation. From automotive fuel to diesel and airplane fuel to fertilizers to your Chapstick. Even the synthetic fibers in your clothing are probably based on distilled oil products.
So the price of oil (the “bubbling crude”) impacts most everything, directly or indirectly.
What “Price of Oil” Actually Means
The actual “price of oil” usually refers only to the price of crude oil, not the distilled or refined products. Yet everything else is based on the price of crude.
Crude oil is divided into two broad categories: Brent crude (global benchmark) and WTI, or “West Texas Intermediate” (U.S. benchmark). Brent is usually more expensive than WTI.
What Is a “Barrel of Oil”?
The unit used to price crude oil is a “barrel,” which is 42 U.S. gallons (about 159 liters). This is just a unit of measurement, not a physical wooden barrel. Oil today is stored and transported via tanks, pipelines, and ships.
Oil Prices Are Set in Markets, Not Oil Fields
Oil prices are set by supply and demand in financial markets by traders (often now highly computerized), not in boardrooms by oil companies. The latest price is the amount at which buyers and sellers agree to trade a barrel.
Oil prices are often forward-looking. They reflect the oil market’s expectations about supply disruptions (like the blockage of the Strait of Hormuz), forecasts of economic growth or slowdown, and production decisions (such as when the U.S., OPEC, or Russia decides to sell more or less).
This is why the risk of oil disruption, like the war with Iran, can move prices immediately.
If the Iran war continues and Middle Eastern oil fields, refineries, and transportation routes remain stalled or in jeopardy, the price of oil can soar. Along with that, watch everything else get more expensive. This would be bad for stocks.
The Trading Opportunity
On the other hand, oil shocks always come to an end, often resulting in big drops in oil prices and dramatic bullish stock market rallies.
The big takeaway: if and when oil prices soar to very uncomfortable heights, this will probably signal a turning point. The top of the oil roller coaster. And a good time to buy stocks.
The price of oil is foundational to a tremendous amount of the world economy. It’s a live signal of global risk, growth, and inflation.
At Compounders Stock Market Academy, we teach you how to read these market signals and understand what actually moves prices, so you can make informed decisions instead of reacting to headlines.