Crude oil is the lifeblood of the global economy, and its pricing is a complex dance of market forces, financial instruments, and geopolitics.
But how is the oil price actually set?
It’s not like you walk around with a barrel of oil in your backpack, asking how much someone’s willing to pay for it.
No, no, no… Oil is priced in a far more sophisticated way… through the futures market.
Indeed, when we hear about "the price of oil," it’s usually referring to futures contracts on benchmark crudes like Brent or WTI, rather than a simple spot price at the wellhead.
But what on Earth is a futures contract? And how does it work?
Well… Let’s dive in.
We’ll explore the roles of key players: producers, hedgers, and speculators, and how each interacts with the market in their own way. We’ll touch on Brent versus WTI, and why some crude types trade at a premium while others are discounted. We’ll also unpack the concept of the term structure, explain contango and backwardation, and revisit some of the biggest price swings in history, from the 2008 spike to the 2020 crash, to see if we can make sense of the wild behaviour of this volatile commodity.
A futures contract is a standardized agreement to buy or sell a specific quantity of oil at a predetermined price on a future date.
These contracts are financial instruments traded on exchanges (such as NYMEX for WTI or ICE for Brent), and their prices fluctuate constantly with global news and market sentiment.
Importantly, the futures market plays a key role in price discovery for physical oil. When you hear the “price of oil” quoted (like Brent or WTI), it usually refers to the price of the nearest futures contract.
For example, if today is September 10, the closest expiring contract might be for September 22. In that case, the price of that specific WTI futures contract (set for delivery on September 22) is what’s quoted as the current price of oil... capisci?
Both the spot price and the futures contract price fluctuate over time, but they converge at expiration.
Here’s an interesting fact: most futures contracts never result in physical delivery. Instead, they’re offset, bought or sold back, by financial participants before expiration.
For example, if you’re a speculator betting that prices will rise, you might buy a futures contract today (just like trading shares on the open market), then sell it before it expires, ideally at a higher price to make a profit, duh! In this case, the contract is closed out, and no physical oil ever changes hands.
Who’s trading futures, and why? Who buys? Who sells? There are also options, swaps, and other financial derivatives, but let’s stick to futures to keep it simple for now.
Oil-producing companies often use futures to lock in prices for their future output and protect against the risk of a price drop. By selling futures (going short) equal to their production, a producer secures a price today for oil they will deliver later.
For example, an independent operator expecting to produce 1,000 barrels in six months might sell one futures contract now at, say, $80 per barrel. What happens if six months later the market price has fallen to $65? Let’s work this out:
Of course, the opposite could also happen: if prices rise above $80, the producer misses out on the additional revenue, as the hedge would incur a loss (the futures would need to be bought back at a higher price). This kind of hedging provides price certainty and should be seen as a form of insurance.
Companies that buy or refine crude use futures to protect against price increases. A refinery planning its crude purchases for the next quarter may go long futures to lock in today’s price. If oil shoots up by the time they need to buy feedstock, the gain on the futures will offset the higher physical purchase cost, keeping their effective cost near the hedged level. Airlines similarly hedge jet fuel (a refined product) or crude indirectly, to smooth out fuel expenses.
Example: An airline might buy crude futures or swaps when oil is $70 to protect against a rise in jet fuel prices; if oil jumps to $90, the hedge profit helps offset the extra cost of jet fuel. These hedgers are not trying to “beat the market”, they simply seek stability for budgeting and operations.
These participants look for price discrepancies across locations, time periods, or related markets and trade to profit from the convergence.
Arbitrageurs play a crucial role in linking oil markets globally. For instance, if Brent is substantially higher than WTI, traders may attempt to move physical barrels from the U.S. to Europe (to sell at the higher Brent-related price) until the gap closes.
Likewise, if the futures market shows that future contracts prices are trading much higher than spot (a condition called contango), a trader can buy cheap physical oil now, store it, and simultaneously sell futures for a later date at a higher price for a profit.
In 2009, 2015, and 2020, contango conditions prompted traders and oil majors like BP and Shell to charter tankers for floating storage. For instance, during the 2009 supply glut, firms stored an estimated 80-100 million barrels globally at sea, buying cheap crude and selling higher-priced futures contracts to lock in profits.
Arbitrageurs exploit such price spreads, moving oil from oversupplied regions to tighter markets or storing it during contango, until spreads narrow to cover only storage and transport costs. This process aligns regional prices and futures curves with supply-demand fundamentals.
Speculators are in the market purely to bet on price direction, not because they produce or need oil. They range from day-trading individuals to large hedge funds and investment banks.
Not only do speculators provide vital liquidity to the futures market (so any buyer can quickly find a seller, and vice versa), but they also assume the price risk that hedgers want to offload.
In the futures market, a speculator might take a long position (like buying shares) if they believe oil prices will rise (e.g., anticipating an OPEC cut or a surge in demand), or a short position (like selling or shorting) if they expect prices to fall (e.g., anticipating a recession or a supply surge). Unlike hedgers, they have no intention of delivering or using the physical oil. They will close out the contracts before expiry for a cash profit or loss.
For instance, a hedge fund might buy Brent futures ahead of an expected embargo on a major producer, hoping to sell them at a higher price once the market rallies. Or a trader might short WTI futures if they believe U.S. inventories are building rapidly.
Speculative activity is sometimes blamed for wild oil price swings, but research has often shown that fundamentals drive the major trends, though speculators may amplify short-term volatility. Nonetheless, speculators’ expectations do influence prices: a wave of bullish speculative buying can push prices higher in the short term, while bearish bets (where bearish views are price-negative and bullish views are price-positive) can drive them lower, until physical market realities catch up.
Overall, the interplay between hedgers and speculators creates a robust market. Without speculators, hedging would be more expensive due to wider bid-ask spreads, similar to the gap between the asking price and the offer in a property sale. And without hedgers, speculators would face a purely zero-sum game. It’s this mix of motivations that makes the oil futures market both highly liquid and ultimately grounded in physical supply and demand.
The speculative game isn’t just for sophisticated institutional investors and traders… you can be a market participant and speculator yourself. All you need is a brokerage account (just like when trading shares) and an internet connection.
You don’t even need to form a view based on the complex interplay of all price drivers, which is often a fool’s errand. Instead, you can trade on price action, reading the chart to gauge market sentiment and placing a speculative bet. It sounds simple, but don’t mistake that for easy. It’s anything but. There’s a saying in trading circles, the 90-90-90 rule: 90% of traders lose 90% of their capital in the first 90 days. Anyway, I digress. Let’s get back to it.
Not all crude oils are created equal. Around the world, thousands of crude streams vary in qualities like density (API gravity) and sulfur content. Yet the industry converges on a few benchmark crude oils that serve as reference pricing markers for everyone.
The three major global benchmarks are Brent, WTI, and Dubai/Oman, and each underpins oil pricing in different regions.
Every other crude oil in the world is typically priced at a differential to one of these benchmarks. These differentials account for quality, transportation, and regional factors. For instance, a heavy sour crude from Canada or Venezuela will trade at a discount to WTI or Brent because it yields fewer high-value products (gasoline, diesel) and requires more refining effort (due to high sulfur). A rule of thumb: light, sweet crudes sell at a premium; heavy or sour crudes sell at a discount.
Logistics are also critical. If a crude is landlocked or far from major markets, it might trade lower to compensate the buyer for transport costs. WTI historically is delivered in Cushing, far from the coast; if inland inventories build up, WTI’s price can fall relative to seaborne Brent due to the difficulty of moving surplus out. By contrast, Brent is seaborne, available to any buyer with a tanker, so it reflects the global waterborne supply-demand balance.
Fundamentally, price differentials reflect the cost to get a given crude to the refiner and the value of its yield.
Brent and WTI are not the largest crude streams in volume (Brent is less than 1% of world production), but they punch far above their weight because they trade in an open market with many buyers/sellers and transparent pricing.
Benchmarks have to be produced in politically stable regions with active markets and storage, so that arbitrage can keep them aligned with global fundamentals.
The liquidity of Brent and WTI futures makes them reliable reference points. Many contracts worldwide (from long-term supply contracts to local spot trades) will simply be priced as “Benchmark ± Differential.” For example: A Nigerian crude might sell at “Brent + $2” if it’s high-quality and well-located, whereas a heavier grade from the Middle East might sell at “Dubai/Oman – $3” reflecting quality discount.
In summary, Brent = global Atlantic Basin light sweet price, WTI = U.S. inland light sweet price, Dubai/Oman = Mideast Gulf sour price. The spreads between these benchmarks tell a story about regional supply gluts or shortages and quality premiums.
Beyond the headline price of the nearest oil contract, there's an important curve in the futures market known as the term structure, which holds valuable insights. It plots futures contracts prices, that is, oil prices for delivery at various future dates (1 month out, 3 months, 6 months, 1 year, and even up to 10 years!)
The curve above shows how the futures market is pricing WTI crude oil for delivery over the next 12 months, with each dot representing one month. The labels on the X-axis follow a code: ‘CL’ stands for the WTI crude oil futures contract, followed by a letter indicating the delivery month (e.g., N for July, Q for August), and a number representing the year. For example, CLU5 refers to the WTI crude oil futures contract expiring in September 2025.
In this example, the market is pricing lower over the next six months. The green bars indicate the trading volume (that is, the number of futures contracts traded) for each delivery month. As shown, trading volume declines further out on the curve, which makes sense, as most activity tends to concentrate in the near term.
Imagine you're a producer with 1,000 barrels of oil to sell. The spot price today is $70. Now, if a buyer asks you to deliver those 1,000 barrels six months from now, would you charge the same price, more, or less?
Normally, you'd charge more, because you'd now be responsible for storing the oil, insuring it, and tying up capital for six months.
These circumstances create what’s known as a “normal” futures curve, one that slopes upward. That's because futures prices must account for the cost of carry, which includes storage, insurance, and the interest on capital tied up while holding the commodity.
This upward-sloping curve reflects a condition called contango, where futures prices are higher than the spot price. A contango market signals that buyers are willing to pay a premium for oil later rather than now.
Why would buyers pay a premium for future delivery?
This usually happens when oil is abundant in the short term (a supply glut) or when immediate demand is low. The excess supply pushes down spot prices, while future prices still include carry costs and expectations that the market may rebalance.
One key implication: contango encourages storage, by both commercial players and speculators/arbitrageurs. As discussed earlier, they can buy cheap now, store the oil, and sell it later at a higher price via a locked-in futures contract.
Extreme contango, known as “super-contango,” occurred in early 2009 and again in April 2020. These periods screamed that the market had far more oil than it could use. The futures curve became so steep that storing oil (even on tankers) almost guaranteed a profit when selling for later delivery through the futures market.
While contango can also reflect expectations of rising demand or tighter supply in the future, it’s typically a signal of a current surplus or a calm, well-supplied market.
Now imagine the opposite situation: you're still a producer with 1,000 barrels of oil, and the spot price today is $85. A buyer asks you to deliver the barrels six months from now, but the futures price is only $78. Wait… why would future oil be cheaper than oil today?
This scenario reflects a market condition called backwardation, where futures prices are lower than the spot price. In this case, you’d rather sell your oil now than lock in a lower price for later.
Backwardation usually signals that demand is strong right now, or supply is tight in the short term, maybe due to geopolitical risks, refinery outages, or low inventories. Buyers are willing to pay more to get oil immediately, which drives up the spot price. But because the market expects the situation to ease, prices for future delivery are lower.
The futures curve in backwardation slopes downward, and that shape tells a story: the market is tight today, but more balanced or oversupplied in the future. Unlike contango, where storing oil can be profitable, backwardation actually discourages storage; why hold onto something that will trade at a lower price later?
In fact, commercial players might even release oil from storage to sell at today’s high prices, helping to ease short-term shortages.
Backwardation can also reflect a strong convenience yield, the added value of having physical oil on hand right now, especially during times of uncertainty. This yield can outweigh the cost of carry, which pulls the futures price below the spot price.
Periods of backwardation are common during tight markets or when demand spikes. It's a sign that oil is more valuable today than it is tomorrow, and the futures market knows it.
There’s another interesting aspect of the dynamics between market participants in backwardated markets. Oil-producing companies are typically hedgers, meaning they sell (short) futures contracts to lock in current prices and protect against potential price declines. If, on aggregate, hedgers are net short futures, then speculators must be net long, taking the opposite side of those trades. When hedgers are willing to pay a premium for this "insurance" (i.e., risk mitigation), speculators (the risk takers) are effectively compensated through an embedded return in their long positions. This is exactly what is expected in backwardation: futures prices are below the spot price but gradually rise over time as they converge toward spot at expiry. In this structure, speculators are essentially “paid” by hedgers for assuming the price risk that producers wish to avoid.
The futures curves in the two charts above show the price of oil for delivery at different future dates, with contract maturity on the X-axis. Don’t confuse this with the chart below, where the X-axis represents time... it tracks how the price of a single futures contract changes as it moves closer to expiry. The futures curves give a snapshot across different maturities at one point in time, while the chart below shows how one specific contract behaves over time.
To sum it up, the term structure of the futures curve, whether in contango or backwardation, offers valuable insight into the market’s perception of current versus future supply-demand dynamics.
Backwardation is typically viewed as bullish: it suggests near-term scarcity and often accompanies strong markets when prices are elevated due to tight fundamentals.
In contrast, contango is generally seen as bearish, indicating oversupply in the spot market, a pattern often seen during downturns or demand shocks.
It goes without saying that these are not hard-and-fast rules. The shape of the futures curve is influenced by a range of factors, including OPEC policy decisions, seasonal demand fluctuations, and broader macroeconomic conditions. Market participants monitor the spreads between futures months just as closely as the spot price, as changes in those spreads often signal shifts in underlying fundamentals. For instance, a narrowing backwardation or a transition into contango may indicate that a supply glut is building, even if the headline price remains relatively stable.
By the way, you can explore the crude oil futures curve yourself, along with curves for other commodities and markets, using a free browser-based tool called QuikStrike, available at: https://cmegroup.quikstrike.net. Sign up for free and have a play… it’s quite interesting!
Oil price forecasting is notoriously difficult. As the saying goes, the only reliable forecast is that most forecasts will be wrong.
Futures prices represent the market’s collective best guess of future oil prices, yet history shows they frequently miss the mark, not only when unexpected events occur, but pretty much all of the time! Indeed have a look at the following graph:
The chart shows the WTI crude oil term structure, the futures curve as it stood at each point in time over more than a decade. Each thin curve represents the market’s pricing of WTI for the next 12 months, revealing what traders collectively expected the price to be.
But as we’ve discussed, these aren’t true forecasts. They’re simply today’s prices for future delivery. Still, they’re often interpreted as market expectations.
So, when did the aggregated wisdom of global market participants ever get it right?
Well… never.
At any given moment, the futures curve beyond the front months is typically flat or gently sloping, implicitly suggesting that prices will drift toward some stable equilibrium.
In reality, though, oil rarely behaves that way. Prices tend to whipsaw with sharp, unpredictable swings, driven by shocks that no model or market consensus can foresee.
Let’s zoom out and look at a longer time horizon:
Neither the futures market nor analysts foresaw the 2008 spike to $140, followed by a collapse to $40 within just a few months.
In 2014, most forecasts confidently projected that $100+ oil would persist, yet by early 2015, prices had plunged below $50.
Empirical studies have shown that oil futures, and most forecasting models, rarely outperform a simple no-change assumption, especially over longer horizons. In fact, futures prices often perform worse than a basic random-walk forecast.
Why? Because oil’s long-term trajectory is driven by unpredictable forces: geopolitical shocks, technological breakthroughs, and macroeconomic swings that no curve or consensus can anticipate. Futures curves reflect current fundamentals and a risk premium, but not black swan events like financial crises or pandemics.
For example, in mid-2019, the futures market projected 2020 oil prices around $60 (look at the curve above again with futures curve over time). A year later, actual prices ranged from $20 to $40, and even dropped to –$40 (WTI) during the COVID shock, a staggering deviation from what was “priced in.”
Yet despite this poor track record, price forecasts remain indispensable. Companies, governments, and investors must anchor their decisions to some view of where prices are headed.
Why? Because planning without a price assumption is simply not an option.
Oil companies rely on price forecasts to support investment decisions. When preparing annual budgets, a company might assume an oil price of $X for the coming year, often based on the futures curve or external forecasts. This assumption affects how they allocate capital, manage staffing, and plan shareholder returns.
If you've been involved in economic evaluations, you're likely familiar with scenario-based planning. Most projects are assessed under a range of cases (conservative, base, and optimistic) to test how robust they are to price fluctuations. Large-scale developments, some involving multi-billion-dollar commitments, require a defined price outlook along with detailed sensitivity analysis to evaluate potential outcomes.
If the assumed price turns out to be far from actual market levels, projects can either fall short of expectations or deliver unexpected upside. Regardless, decisions must be made using the best information available at the time.
Hedging programs also depend on forward price curves. These represent an implicit forecast that the company deems acceptable. For instance, if a producer sees futures trading at $70 for the following year and considers that a favorable level, they may hedge part of their production. If they believe prices will be higher, say $90, they might hedge less to retain upside exposure. In either case, the company’s internal price outlook influences its hedging strategy.
Governments, particularly in oil-exporting nations, use price forecasts to set national budgets. OPEC countries like Saudi Arabia or Iraq publish official projections and often define a “fiscal breakeven” oil price to balance their budgets. Overestimating prices can result in fiscal deficits, while underestimating them may lead to budget surpluses. Oil-importing countries also forecast prices to inform inflation targets and energy policies. Central banks and finance ministries closely track oil forecasts because crude prices significantly impact inflation expectations, trade balances, and overall economic growth.
Industries across the economy depend on oil price forecasts for operational planning. Airlines set ticket prices and fuel surcharges based on projected fuel costs. Automakers adjust production strategies, shifting between less fuel-efficient vehicles and more efficient models, based on anticipated gasoline prices. Chemical manufacturers plan around expected feedstock costs, and even farmers factor fuel prices into their budgets. The broader economy is highly sensitive to energy costs, making an oil price outlook essential for sound strategic decisions.
In short, we predict oil prices not because we’ll be right, but because we have to make decisions.
Planning for the future with no view on oil price is simply not an option. Thus, companies use tools like scenario analysis (e.g., “What if oil goes to $120? What if it drops to $50?”) to ensure robustness under various outcomes.
Price forecasts (like those from the EIA, OPEC, or IEA) often come with error bands or alternative cases to acknowledge uncertainty. For example, the U.S. Energy Information Administration’s Annual Energy Outlook always includes high and low price cases around its reference case, explicitly admitting that actual prices will wander.
Futures curves can be viewed as one possible scenario, essentially reflecting the market consensus at a given point in time. That said, as discussed earlier, futures prices are not true forecasts, so they must be interpreted with caution.
Oil price prediction is inherently error-prone, often considered a fool’s errand, but it remains essential for economic and financial planning. As I once read somewhere, "Plan with a forecast, but also plan for that forecast to be wrong."
What fundamentally drives crude oil prices?
Well… it's an incredibly complex interplay of many different factors.
Supply shocks are one of the fastest ways to move oil prices. When supply suddenly drops, say, due to war, sanctions, a pipeline attack, or even a hurricane that shuts in production, prices tend to spike fast. There's simply less oil to go around, and buyers end up bidding against each other to secure barrels.
On the flip side, a sudden surge in supply can crash prices just as quickly. Think of OPEC opening the taps, or the U.S. shale boom that flooded the market. The market wasn’t ready for it, and prices tumbled.
What makes supply shocks so powerful is that oil demand doesn't adjust quickly. Most people and businesses can’t just switch fuels overnight. So when supply changes suddenly, the price has to do the heavy lifting.
OPEC decisions are a major force in oil price movements. OPEC, with partners like Russia in OPEC+, can influence prices by adjusting supply, controlling 35% of global output (50% with Russia).
When OPEC agrees to cut production, prices often go up. That’s because traders expect less oil to be available down the line. On the other hand, when OPEC members fail to agree or start a price war, prices can crash as the market braces for a flood of extra barrels.
How much influence OPEC actually has depends on two things: spare capacity and internal discipline. If members start ignoring their quotas, or if non-OPEC producers like the U.S. ramp up supply at the same time, OPEC’s moves lose some of their impact.
Markets track OPEC closely; Saudi comments can shift prices, with cut hints supporting floors and quota increases capping them. Spare capacity, mainly Saudi Arabia’s, acts as a buffer. Low capacity drives prices up due to outage risks; high capacity keeps prices lower, signaling quick supply response.
Demand swings are just as important as supply when it comes to oil prices. Global oil demand was around 100 million barrels per day before COVID, and it’s closely tied to overall economic activity. When the economy is growing, more production, more transport, more travel, oil demand rises. If supply doesn’t keep up, prices go higher.
On the flip side, during slowdowns or recessions, demand falls. The 2008 financial crisis is a clear example… Global oil demand dropped by millions of barrels per day, and prices collapsed.
Transport is the biggest driver of oil use. Cars, trucks, planes… They all need fuel. That means trends like fuel efficiency, electric vehicles, and changes in travel habits can gradually reduce demand over time. Seasonality plays a role too. Summer driving and winter heating both create predictable swings: gasoline demand peaks in the summer, heating fuels like propane or heating oil peak in the winter.
Government policies also matter. Fuel subsidies, taxes, or efficiency rules can shift how much oil gets used. Technology has a role too. More efficient engines mean less oil needed per mile or per unit of output.
The COVID-19 pandemic in 2020 was the most extreme demand shock the industry has seen. In April of that year, global demand dropped by more than 20 percent year-on-year as travel and economic activity came to a halt. That crash in demand directly triggered the historic collapse in oil prices.
In simple terms, strong demand pushes prices up, weak demand pulls them down. But since oil demand doesn’t change quickly (most people can’t just stop driving or flying overnight) even small mismatches between supply and demand can lead to big price swings.
Geopolitical events and risk perception play a big role in oil prices, even when supply hasn’t actually been disrupted. The possibility of future trouble is often enough to push prices higher. If there’s tension in the Middle East, strained relations between the U.S. and Iran, or any signs of instability in key producing regions, traders start pricing in the risk of something going wrong.
Take the Strait of Hormuz, for example, a narrow waterway through which a sizable chunk of the world’s oil flows.
Any threat to that route, such as conflict or military action, can push prices higher quickly, even if tankers are still moving, as we saw after Israel's strikes on Iran’s nuclear facilities in June 2025.
Other examples include sanctions, civil unrest, or coups in places like Nigeria, Venezuela, or Libya. These don’t always stop exports immediately, but the fear of disruption is often enough to move the market.
On the flip side, when tensions cool off or new agreements are reached, prices often ease.
Geopolitics often overlaps with OPEC decisions too. In general, anything that threatens oil supply from major producers tends to drive prices up. Peace deals, diplomatic breakthroughs, or unexpected production agreements can do the opposite and bring prices down.
Inventories and stock levels act as the oil market’s buffer between supply and demand, and traders watch them closely. High inventories signal oversupply and tend to pull prices down. Low inventories suggest a tighter market, pushing prices up due to limited cushion for disruptions.
In the U.S., the weekly EIA inventory reports often move the market. If there’s a surprise draw, meaning stocks fell more than expected, traders take it as a bullish signal (thinking prices might go up). A big build, on the other hand, is seen as bearish, pointing to weaker prices ahead. Globally, OECD inventory data plays a similar role, just on a slower, monthly cycle. When production exceeds demand, the extra barrels go into storage. When demand outpaces supply, we draw from those stocks. That’s why inventory trends help signal the market’s balance.
Traders also keep an eye on floating storage and SPR (Strategic Petroleum Reserve) releases, which can temporarily add supply to the market and influence prices.
In short, inventory levels and price often move in opposite directions.
Financial flows and speculation can move oil prices in ways that go beyond supply and demand. Oil isn't just a commodity, it's also traded like an asset. Hedge funds, index funds, and algo traders all play a part. When big players go long on crude futures, their buying can lift prices. When they pull out, prices can drop fast.
Oil also tends to move with other markets. For example, it might rise with stocks in a risk-on mood, or fall when the U.S. dollar strengthens. Since oil is priced in dollars, a stronger dollar makes it more expensive in other currencies, which can hurt demand.
Higher interest rates can also matter. They raise the cost of storing oil and slow economic activity, both of which can pressure prices.
Speculation sometimes adds fuel to the fire, amplifying price swings up or down. A clear example was in 2008, when some believe a wave of speculation helped push oil to $147, only to crash soon after as the financial crisis unfolded.
In short, financial flows can exaggerate whatever direction fundamentals are already pointing toward.
Global macro factors shape oil prices through both demand and investment conditions. Strong global growth, especially in emerging markets, lifts oil use, while recessions drag it down. Inflation can attract investors to oil as a hedge. On the flip side, rate hikes by central banks can slow growth and strengthen the dollar, both of which tend to push prices lower.
Policy also plays a role. Support for renewables or electric vehicles can gradually reduce long-term oil demand. Taxes like carbon pricing can do the same. Meanwhile, production costs help set a floor. If prices fall too low, supply contracts. If prices go well above breakeven, investment pours in and future supply rises.
These forces often overlap. Sanctions might limit supply just as demand surges. Or OPEC could boost output into a weak economy, crashing prices. For anyone watching the market, tracking these moving parts, from GDP trends to central bank decisions, is an essential, all-encompassing job.
Crude oil’s price history is full of big swings and turning points. Let’s walk through a few major events from the past couple of decades and see how the drivers we just covered showed up in each one, to put the market mechanics into real-world context.
Let’s start with the obvious: oil prices are cyclical. They tend to rise during economic booms and fall sharply during demand shocks. You can see in the chart above that major economic recessions (highlighted in gray) often line up with big drops in oil prices. When the economy slows, oil demand weakens, and prices usually follow.
In the mid-2000s, strong demand growth, especially from China, and limited spare capacity pushed oil prices higher. By July 2008, WTI hit a record high of around $140 per barrel. Add in geopolitical tensions and a weak U.S. dollar, and prices soared.
But the surge didn’t last. As the financial crisis unfolded, oil demand collapsed. By December 2008, prices had crashed to $40, a ~70% drop in just a few months. OPEC was slow to react but eventually cut production, and by mid-2009, prices had rebounded to around $70.
The lesson? Demand shocks can overwhelm even tight supply. The GFC was a clear reminder of how quickly oil markets can swing, and why risk management matters.
From 2010 to 2014, oil prices stayed mostly in the $80-$110 range, supported by steady demand and OPEC’s control. But U.S. shale production was ramping up fast, cutting import needs and adding new barrels to the market. By late 2014, faced with a growing surplus, OPEC chose not to cut output. Instead, they held firm to defend market share.
The result was a price collapse. Oil priced dropped from ~ $100 in mid-2014 to ~$30 by early 2016. The market was flooded with supply, demand was soft in parts of the world, and inventories ballooned. OPEC’s strategy hurt everyone, including themselves. Many U.S. shale firms went bankrupt, and global investment dried up.
By 2016, even OPEC had had enough. They teamed up with Russia and agreed to cut production, helping prices recover to around $50–$60 by 2017. The episode showed how quickly the $100 oil era could unravel, and it taught both OPEC and shale producers some hard lessons about resilience, efficiency, and market limits.
Let’s now switch to a WTI futures chart instead of spot prices, as it better illustrates the next two events we’re about to walk through.
The year 2020 was one for the history books. It started with oil prices around $60 and a modest supply overhang. But in March, two things hit at once: a price war between Saudi Arabia and Russia, and the global spread of COVID-19. Lockdowns brought travel and transport to a halt, and demand collapsed by more than 20 million barrels per day.
At the same time, OPEC+ talks broke down. Saudi Arabia ramped up production and slashed prices, flooding a market that was already sinking. Storage filled up fast. By April, there was literally nowhere to put the oil.
Then came the moment no one saw coming. On April 20, 2020, WTI futures went negative for the first time in history, trading as low as –$40 per barrel.
What? How on Earth?
See, those speculators who are long futures, are not interested in taking delivery of the physical oil, so they need to close (sell) their futures contracts before expiry, otherwise they’re forced to take delivery.
But they can not find buyers for their futures, because nobody can take delivery as there is no storage available!
By trading at negative prices, these traders are literally saying “I’ll pay you to take my oil” as they just need to get rid of it.
It was the result of sudden demand destruction, an oversupplied market, and storage at capacity.
Just as the world was recovering from COVID, Russia invaded Ukraine in February 2022. As one of the world’s top oil producers, the risk of losing Russian supply sparked panic. WTI jumped to as high as $130 per barrel. Fuel prices followed, and inflation took off globally.
Although Russian oil kept flowing, mostly redirected to Asia, the fear of supply loss created a massive risk premium. The U.S. and others released strategic reserves to cool prices, and demand softened at those high levels. By late 2022, the oil price had settled back into the $70–80 range, helped by economic concerns and rising interest rates.
The episode showed how fragile supply chains can be and how quickly geopolitics can push oil into crisis mode. It also reminded the world that oil isn’t just a commodity, it’s a strategic lever that can shape inflation, policy, and the global economy.
Looking back at these events, one pattern stands out: oil prices react sharply to imbalances and often overshoot. Because both supply and demand are slow to adjust, even small disruptions can lead to big price swings.
The market is also deeply cyclical. High prices tend to destroy demand and attract new supply, while low prices do the opposite, boosting demand and choking off investment.
As the saying goes, the cure for high oil prices is high prices… and vice versa. You can see it in the 2008 spike followed by a crash, or the 2020 COVID crash that set up a bounce and tighter conditions by 2021.
Crude oil pricing sits at the intersection of market psychology and physical fundamentals. Futures markets are where prices are discovered and risk is managed. Benchmarks like Brent, WTI, and Dubai/Oman simplify a complex, global mix of crude types, with adjustments made for quality and logistics.
Hedgers bring stability. Speculators and arbitrageurs bring liquidity. The futures curve tells us something about market sentiment, whether things feel tight or oversupplied, and while price forecasts are rarely accurate, they’re necessary for planning and budgeting.
We’ve seen how the major drivers (OPEC moves, demand swings, storage, and geopolitics) repeatedly send oil into boom-bust cycles. The wild swings of 2008, 2014–2016, 2020, and 2022 all came with lessons: flexibility matters, cooperation is fragile, and managing risk isn’t optional.
For oil and gas professionals, understanding how oil is priced isn’t just academic, it’s core to making better calls in trading, investment, and operations.
Futures, options, inventory data, and price spreads are tools to help navigate uncertainty. The cycle always turns, and the best decisions come from staying informed, not reacting blindly.
Looking ahead, energy transition, policy shifts, and climate pressures will add new layers to oil pricing. But the fundamentals, futures markets, benchmarks, supply and demand, will still drive the core of how oil is valued.
The oil market keeps everyone humble. No one controls it for long. But those who understand how it works will always be better prepared for whatever comes next.
Oil price forecasting is not about being right. It’s about planning and making decisions.
Explore a curated collection of valuable resources in our Store, both free and paid, all designed to help you upskill.
Alan is a Consulting Petroleum Reservoir Engineer with 20+ years of international industry experience. Alan is the founder of CrowdField, a marketplace that connects Oil & Gas and Energy businesses with a global network of niche talent for task-based freelance solutions. His mission is to help skilled individuals monetize their knowledge as the Energy transition unfolds, by bringing their expertise to the open market and creating digital products to sell in CrowdField's Digital Store.
Subscribe to O&G AI Wave – your indispensable guide to the evolving world of AI and NoCode and their practical applications for Oil & Gas professionals.
Our newsletter brings you the latest trends and insights in AI and NoCode technologies directly impacting the O&G sector.
Every issue is packed with expert analyses and practical tips to help you navigate and leverage these transformative technologies.
Don’t miss out on the opportunity to stay ahead of the trend and future-proof your career in this incredibly dynamic field.
At CrowdField, our mission is to empower YOU—helping you showcase your skills in the open market and monetize them effectively. Here's how you benefit from being with us:
👉 Make your mark and find freelance opportunities by listing yourself in our freelancer directory to get noticed. Join us for free here.
👉 Turn your skills into digital products that sell. We'll help you polish, launch, and list them in our Store, promote them on our LinkedIn page, to our email subscribers, and feature your success in a case study on our Blog, amplifying both your product and personal brand. Whether you're at the idea stage, midway through implementation, or nearing completion, if you see potential for monetization, we're interested. Take the first step by getting in touch to start a conversation at hello@crowdfield.net.
👉 Discover bargains in our digital store with heavily discounted prices during our market discovery period. Take advantage of these limited-time offers as we expand our network. Dive in now and find your gem! Got to Store
