Factors determining crude oil price

Causes of oil price increase have been a subject of much interest and numerous studies given the importance of oil as the main source of energy of the world. In the last two decades, the price of crude oil has been fluctuating rapidly and at times drastically. But the causes of the rise in the price of crude oil still remained a controversy. Literature has two views. The first group argues that the changes in oil prices are due to supply and demand. The other claims that financial variables (speculation and future markets) play a big role in crude oil price changes. The objectives of this study to determine the main determinants of crude oil price changes by using the VECM model and examine the effect of the new variables in the oil market such as; days of forward supply and convenience yield on oil price changes. This study examines four main factors that affect crude oil prices which are; supply variables, demand variables, geopolitics and speculation. The results of this study indicate that oil prices in the last two decades especially after the crisis in 2008 are determined by fundamental variables which are total oil rigs, days of forward supply and convenience yield. Moreover, principal component analysis indicates that days of forward supply is the nearest factor in the PCA coordinate system which explains the changes in crude oil prices