The world’s crude oil price plunged below $30 a barrel on Tuesday for the first time since 12/2003. So the price has been down 19% this year alone. More terribly, compared with the oil’s June Protected content of about $108, the oil price incredibly plunges 72%. According to Barclays commodities analysts, this situation of oil markets is far worse than previously thought.
Of course, this is great news for consumers. In the U.S, the average price of a gasoline gallon fell below $1.97 this week, compared with $3.68 about 18 months ago.
Here’s why the crude oil prices keep falling lower.
1. “Complete breakdown of OPEC cohesion”
After Nigeria’s top oil official and OPEC President Emmanuel Kachikwu told CNN that OPEC was considering an emergency meeting, there were hopes of an output cut.
After OPEC President Emmanuel Kachikwu told that OPEC was considering an emergency meeting, there were hopes of an output cut. But...
However, officials from the United Arab Emirates extinguished those hopes when saying the current strategy is still working.
The public confusing moves between OPEC members reveals the deep fractures within OPEC that have reduced the already-low chances of this cartel cutting output.
“Complete breakdown of OPEC cohesion” – Barclays calls all of this like that.
2. China is unnerving everyone
Concerns over China’s economy are not only bad for the stock market. If China economy is truly slowing more than investors realized, that would mean this country needs less oil to fuel its economy. That is indeed a frightening thought for those that were hoping oil price would recover soon.
3. Defiant American oil production
The oil crash is also fueled by an excessively abundant supply apart from the demand fears. That excessive supply was mainly created by the U.S shale oil boom.
The American oil production has not suffering the loss that many thought it would. This country pumped an average of 9.35 million barrels/ day in October, down just a bit from the peak of 9.7 million in April, according to the government. That hurts the oil prices because the U.S production likely needs to come down enough to ease the excessive supply. According to Michael Wittner, global head of oil research at Societe Generale, “the market has lost confidence that U.S shale will decline quickly enough to perform its job this year of beginning the global rebalancing process.”
4. Iran is getting ready
The world’s oil market is bracing for Iran to deepen the excessive supply by pumping much more oil very soon.
This country is making progress in fulfilling its obligations to receive the sanctions relief under its nuclear deal with the West. Thus, Iran may be likely to return later this month or in February.
Up to now, it is still a big mystery just how much oil this country will be able to pump. But despite the price crash, it is unlikely that Iran will back down. Even just a gradual rise in output can worsen the excessive supply problem.
5. Strong greenback
Crude oil currently trades in U.S dollars. That means when the U.S dollar gets stronger, oil becomes more expensive for overseas buyers.
That’s why the American multinational financial services corporation Morgan Stanley warned on Monday that the strong dollar could send oil dipping to $20 a barrel.
While cheap oil is great news for American consumers, it is the bad news for the stock market. Shares of S&P Protected content companies are already down 10% thus far this year, whilst oil and gas companies like Marathon Oil and Anadarko Petroleum have plummeted over 20%.