What’s Causing Oil’s Historic Slump?

oil prices

As production of oil outpaces its demand, prices per barrel practically plummet. Prices have fallen so quickly, that the price of crude is currently on the longest losing streak since March 1983 when futures first began trading. With widespread expectations of excessive global oil supply, the US benchmark has found its way to the lowest price of the year so far.

Tuesday on the New York Mercantile Exchange, crude oil dropped in price 7.1% down $4.24 to $55.69 a barrel. This sharp drop not only marks the end of the current twelve-day decline streak but also is the lowest mark for the last twelve months as well, furthering the plunge into a bear market.

With this type of trend, falling stock prices cause investor confidence to plummet right along with the oil prices. Many may decide to sell off stocks to avoid further losses.

However, at least one petroleum analyst believes the oil’s decline may have been over-exaggerated. He believes that even though Tuesday’s dramatic nosedive was astounding, that prices are as close to the bottom as they’re liable to get. Another analyst says that even as Saudi Arabia is the most influential of all oil producers, that they can’t maintain their rate of current production for long.

After posting an almost year-long high back on October 3, oil prices have still managed this sudden drop. There are several factors which have contributed to this status.

First, oversupply, as aforementioned, is outpacing its demand. Production of oil was raised in September by the Organization of the Petroleum Exporting Countries (OPEC) by a hundred thousand barrels a day. This brought production up to 32.78 barrels a day, which is the highest production rate of the year.

Next, President Trump signed waivers allowing the continued purchasing, albeit temporary, of Iranian oil by eight countries in spite of sanctions. The US hadplaced sanctions against Iran’s energy sector, which took effectthis past November 4. These waivers overrode those sanctions.

In addition, this time of year is typically when planned shutdowns occur for maintenance at many major crude-oil refineries. However, refineries have been more active this year, causing inventories to continue to rise during a season which had already expected to see demand for oil slow.

Another reason for plummeting prices is due to Trump’s consistent advocation for lower prices. His latest attempt was when he issued a tweet on Monday calling for OPEC to drop prices even lower.

Lastly, the production of US oil has continued to climb as well. With American producing 11.6 million barrels of oil a day, the oversupply just keeps getting larger.

As expected, the falling oil price has investors rattled, engendering fear of global economic growth and uncertainty in the market. This has been a huge reversal in prices. It was just a little over a month ago when the price of oil spiked at $76 a barrel around the first of October. Nervous oil traders have not even been calmed by Saudi Arabian efforts to cut shipments by a half million barrels a day.

For the most part, this over-production is due to Trump initially vowing to slap sanctions on Iran, allowing no oil to be shipped out of their country, and then later granting waivers so that some nations would be able to continue buying from the sanctioned country. 

In addition, the US, Russia, and Saudi Arabia also continue pumping out oil at higher production rates than normal to compensate for Iran’s shortfall that has yet to come. With Trump continuing to add pressure, it has combined to add further unpredictability.