Oil Sinks Below $40 Thanks To Perfect Storm Of Market Conditions

Crude Oil Prices

Crude oil tumbled below $40 a barrel on Wednesday for the first time since August.

It’s the latest sign that the world still has more oil than it needs despite production cuts in the U.S. This is great news for American drivers, many of whom are already enjoying gasoline prices near $2-a-gallon.

Oil plummeted to a low of $39.91 a barrel on Wednesday, down 14% so far in November.

Crude oil prices have reached their lowest level since August when markets reacted to China’s suddenly collapsing market conditions.

Oil prices began to rise in September and October over the believe that the global recession was slowing. In early October, oil hit $50 following Russia’s launched attacks in Syria which raised concerns over supply disruptions.

 

OPEC and U.S. suppliers feed the oversupply

Last week, the International Energy Agency warned the supply glut is actually getting worse. The agency reported 3 billion barrels of oil in global stockpiles, describing it as a “massive cushion.”

The IEA pointed to “vigorous production” from OPEC nations such as Saudi Arabia, which has steadfastly refused to cut output despite depressed prices.

Recently it was revealed that Iraq is flooding the United States with cheap crude oil. Iraq has more than doubled its exports to the US since August.

U.S. suppliers are also proving how resilient they can be in the face of sinking oil prices. American oil production actually decreased significantly from August to September to a one-year low. However, U.S. suppliers have learned to act in a nimble fashion, quickly ramping up supply when prices increase, allowing them to capture more of the market.

The U.S. Dollar

The U.S. dollar also continues to strengthen which has allowed producers to purchase oil at cheaper prices. The Federal Reserve is finally ready to raise interest rates but for now the U.S. dollar has increased 3% against a basket of currencies in the last month.

The U.S. dollar has nearly reached parity with the euro.

 

When the U.S. dollar is strong commodities such as oil are more expensive for foreign buyers, who then buy less crude oil, which in turn allows supply to far outweigh demand.

On a positive note, with oil prices continuing to remain low, U.S. consumer sentiment is continuing to climb, just in time for retailers to capitalize on the holiday shopping season.