Supply and demand are the basis of every commodity market, and Crude Oil is no exception. In the Crude Oil market, participants “count barrels,” or watch the relationship between the number of barrels produced and the demand for these barrels from refiners. When there's more supply of oil than demand, oil prices will fall. When there’s lower supply of oil than demand, oil prices will rise.

For professional oil traders working at big oil companies, staying on top of changes in the market is no small feat. They go to great lengths to count barrels including flying helicopters over oil storage sites to see how full the tanks are and paying for satellite images to monitor production facilities or oil tankers at sea. They also access any real-time information they can by monitoring flight takeoffs and the number of people filling up their vehicles at gas stations. Oil companies also have teams of analysts to monitor other factors that could impact the market such as electric vehicle purchases and upcoming weather events. A company's willingness to go to these measures to count barrels shows how important it is to assess supply and demand.

While the everyday market participant may not have the ability to collect data at this level of detail, it is possible to broadly access the balance of supply and demand by monitoring a few key indicators.

During a difficult economic time or recession, oil demand often decreases. For example, the lockdowns at the beginning of the COVID-19 pandemic caused people to move around less, resulting in a slower economy and reduced oil consumption. Participants can watch the economic news in major area such as China, the U.S., and western Europe to understand possible economic impacts in the Crude Oil market. Weather is another factor to consider, as there may be a greater demand for oil as a source for heat during a cold spell or air conditioning during an unusually hot summer.

On the supply side, it’s beneficial to be aware of events in oil-producing areas. For example, a storm in an oil-producing area like the Gulf of Mexico may be bullish for prices; however, if the same storm impacted an oil-processing area like the refineries in Texas, then the impact on price may be less obvious.

Geopolitics involving major oil producers can also impact oil prices. For example, news of a ceasefire between Russia and Ukraine might allow Russia to sell more oil to the rest of the world and increase overall supply. Similarly, news around lifting sanctions in oil-producing areas like Iran might increase supply and bring the oil price lower. Remember that the opposite could also be true – any negative news about an oil-producing area could increase prices since there may be lower production.

The Organization of the Petroleum Exporting Countries (OPEC) consists of some of the largest oil producers on the planet. Its members meet regularly to discuss the state of the oil industry and determine if they need to produce more or less oil to balance supply and demand. The outcomes of these meetings, as well as any comments or reports made by OPEC ministers, have a significant impact on the oil price. For example, if the Saudi oil minister says that OPEC is worried there is too much oil on the market, it could be a bullish signal since it implies that OPEC might be working to reduce supply.

The main factor that drives oil prices is the balance between supply and demand. To anticipate any potential upsets in this balance, traders can pay attention to possible catalysts in producing and consuming areas including global economy performance, weather, geopolitics, as well as any comments from OPEC and its ministers.

For a deeper look into how the market responds to OPEC meetings, check out this Excell with Options article.