After hitting the $100/barrel mark the other week, crude oil prices slipped by roughly 5% since Monday. I guess this means it’s time for Big Pippin to gas up his yellow Lamborghini, yellow top missin’!
Nearly a month ago, I gave three reasons why oil prices could keep rising and among these are persistent threats to oil supply. As it turns out, oil supply ain’t a problem anymore! Well, at least that’s what the most recent happenings revealed.
Check out some of the reasons explaining the sudden drop in black crack prices over the past few days:
1. White House to release oil from their Strategic Petroleum Reserve?
Oil made a surprise drop on Monday’s New York trading session as prices fell by roughly 2.5% in less than 30 minutes. Analysts later on attributed this early plunge to rumors that the White House would release oil from the U.S. Strategic Petroleum Reserve, which is the Department of Energy’s emergency fuel storage.
A couple of days later, White House officials confirmed these speculations as they mentioned that the President is currently watching the rise in oil prices very closely and that “all options for dealing with high oil prices are on the table.”
2. Saudi Arabia offered to supply more oil.
Another factor that triggered the selloff in black crack was Saudi Arabia’s announcement on providing additional oil supply to U.S., Europe, and Asia. Financial Times reported on Wednesday that a senior oil official in the Gulf remarked that oil prices are way too high and that they are ready to ramp up oil supply in order to bring prices down.
Recall that G7 finance ministers urged Saudi Arabia, the largest oil exporter in the world, to expand production a few months back to keep up with the growing demand. Earlier during the week, Saudi Arabia decided to give in to these requests as they worried about the negative impact of skyrocketing oil prices on the global economy.
3. U.S. crude oil inventory is piling up.
Last but certainly not least, the U.S. crude oil inventory report released on Wednesday revealed that stockpiles grew by 8.5 million barrels the other week. This was its fastest pace of increase since the first quarter this year, signaling a potential oversupply in oil.
Apparently, oil companies in the Gulf of Mexico resumed operations a few weeks back as they already recovered from Hurricane Isaac. This resulted to a huge jump in production, causing inventories to overshoot the estimated increase of 1 million barrels.
In a nutshell, these recent reports show that a potential drop in oil supply isn’t an immediate threat for now since stockpiles are high and exporters are ready to increase production. The problem is that demand for oil hasn’t exactly been on the up and up lately, as most major economies are still in a slump.
According to my notes from my Economics 101 class back in the day, an increase in supply or a decrease in demand for an asset makes its price drop. What we just witnessed last week was a combination of both factors, which explains the pronounced effect on oil prices.
As Happy Pip noted in her latest trade update, these oil-related events affected the forex market as it triggered a selloff among commodity currencies, particularly the Loonie. Now that’s an excellent reminder to not take intermarket correlations for granted!