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Oil prices fall fast: What does it mean?

December 20, 2018
Wambolt Team

Oil prices dropped fast in recent weeks, driven largely by fears of growing U.S. output and weaker global demand. The Organization of Petroleum Exporting Countries (OPEC) has resolved to cut output in 2019 in an effort to stabilize oil prices.

Global oil prices declined sharply in November, with the domestic benchmark (WTI) falling 22% for the month, the single largest monthly drop in 10 years. The steep drop in price is a result of increased production by U.S. producers as well as Saudi Arabia, Russia, and OPEC.

The recent price decline is of grave concern to OPEC, Russia, and Saudi Arabia, whose breakeven cost for oil production is estimated to be higher than U.S. production. The rapid expansion U.S. supply has resulted in large amounts of unrefined oil in storage. Construction of new pipelines and transportation infrastructure in the U.S. will speed the shipment of crude oil to refineries for production more efficiently over in upcoming years.

Adding to oil’s pressure is the strong dollar, which lowers oil prices internationally since oil is primarily traded in U.S. dollars worldwide (see Strong U.S. dollar impacts economy unevenly). Sanctions on Iranian oil exports were not as rigid as planned, continuing to allow millions of additional barrels to flood world markets.

The U.S currently exports more oil than it imports, which helps insulate the country from global price swings and adds leverage for U.S. producers competing with foreign producers. U.S. exports of crude oil and petroleum products have more than doubled since 2010 according to the Department of Energy.

Sources: Department of Energy, IEA

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