Why Are Oil Prices Falling Today?

November 14, 2018
596 Views

In early October, oil prices posted a 52-week high, giving plenty of confidence to investors who engage in the energy sector. While stocks were volatile, oil was strong, leaving at least one option for diversification outside of traditional investments.

A lot has changed in just over a month. On Tuesday, prices fell by 7.1%, leaving oil at its lowest benchmark of 2018. Crude is now officially in a bear market, with 12 consecutive days of losses. Oil prices haven’t finished this low since November last year, and the single day slide of 7.1% is the worst that has been seen in three years.

Crude is currently trading at $55.42 per barrel on the New York Mercantile Exchange.

What’s Causing the Steep Decline?

Some analysts and investors have stated that the U.S. was the catalyst for the current market. Saudi Arabia upped production when the U.S. applied sanctions on Iran earlier this year. However, Iran didn’t stop production.

OPEC output increased by 100,000 barrels per day in September. At the same time, President Trump gave waivers for countries like India, South Korea, and Japan, allowing them to continue purchasing Iranian oil. This contributed to excess supply.

The U.S. has also been increasing production in recent weeks. In November, production is up by 400,000 barrels per day. Domestically, the nation is now producing up to 11.6 million barrels per day.

Another factor is that seasonal conditions have not occurred as expected. Producers usually shut down some refineries during the fourth quarter for routine maintenance and inspection. There have been fewer shutdowns this year, which has left more barrels on the market than expected.

While the situation is complex, the underlying factor is the issue of excess supply.

Low Oil Prices Drive Economic Uncertainty

Lower oil prices can benefit some areas of the economy, but also hurt producers and ancillary companies. Markets have been rattled by the falling price of crude, with the S&P 500 index down -0.15% on Tuesday and -1.21% for the last five days. Prices will need to stabilize before investors regain confidence.

Saudi Arabia has agreed to lower production and it is speculated that other OPEC nations could follow. This could bring supply back into balance, which is something that the market desperately needs if prices are to return to manageable levels.

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