As it is in the openly traded commodities market, the web of factors affecting energy prices is complex. This is why the market forces of demand and supply are responsible for the fluctuations in the energy market. Simply put, the pricing of energy sources is subject to what buyers need and what the market has to offer at that point in time. As unstable as this may sound, these shifting conditions can easily be taken advantage of. All that is required is a sound knowledge of the variables that drive energy prices. Let’s look at some of them. Read on
Energy pricing is relatively stable during normal market conditions, so market cycle transitions are gradual. Regardless of the peaks and valleys, the prices within an anticipated range. However, these are the factors that drive energy prices:
Weather: Although the weather is predictable to some degree, it is largely unpredictable and is one of the most influential factors of prices. Its unpredictable nature causes seasonal market cycles that can cause a variance in demand and supply. Hurricanes and blizzards are known to destroy energy facilities and hamper transportation (among others). Such incidents have impacts on prices.
Government Regulations: Governments are in the business of regulating energy policies within their political spaces. These changes in government regulations and policies directly affect the market forces of demand and supply. Once those market forces are affected, the prices of energy products will also be affected,
Outages: Power outages (scheduled or accidental)always affects the supply of energy products. This is because power is required in the production process of these energy products, and once there is an outage, these processes are stopped or delayed at best. Once there is a fluctuation in the supply, there will be a corresponding change in the demand and by extension, the pricing of the energy products.
Source Fuels: Price is influenced by other energy sources because of the interdependency of the markets. Take the electricity and natural gas markets, for example. Their supply, demand and prices are influenced by other source fuel markets, including crude oil and coal. As such, many investors switch energy sources so as to control costs. This is why the change in the price of one energy source directly affects the pricing of others.
Geopolitical Events: Events like wars, political unrest and other forms of crises that destabilize political stability directly affects pricing. This is because, in such regions, the import or exports of energy products are hampered. This affects demand and supply and ultimately the prices both in the long term and short term. The uncertainty that these events cause changes in the market as alternate streams of energy might be created, thus disrupting the market as a whole and influencing the pricing of products negatively or positively.
The energy market is highly volatile because the complexity of the attendant variables can affect prices. However, investors can learn to use this volatility to their advantage as long as they have a basic understanding of the variables that influence the market. The best part is that there are always experts from whom valuable insights can be gotten from.