The price of a barrel of West Texas Intermediate (WTI) oil fell 5% on Wednesday to $81.84, well below the $100-120 range of the past few years. Two reasons are being given for the startling collapse in oil prices.
First, the supply of oil is surging. In the U.S., shale oil production ("fracking") has been growing rapidly. Non-OPEC countries have been exporting more oil. Canada has replaced Saudi Arabia as the largest source of imported oil to the U.S.
Second, the demand for oil is falling. Sluggish economies around the world mean less oil is needed, and even China's demand is softening.
Generational Dynamics predicts a global deflationary spiral, and the falling price of oil is part of that. Countries like Russia, Iran and Saudi Arabia, which depend on income from oil sales, will be suffering economic woes that will translate into a general global slowdown.
Since hitting a peak of over $107 in June, the price of West Texas Intermediate crude oil has since fallen over 24%. It dropped as far as $80 a barrel on Wednesday, the lowest since June 2012. Brent crude oil has also struggled, falling as low as $84.85 a barrel Wednesday. That’s the lowest since November 2010.
“While decline in demand was the key driver for the 2008 crash, the sharp drop in prices this time around is being caused by a supply glut. Continued growth in U.S. shale production and increase in non-OPEC countries oil exports have led to excess capacity,” he wrote in a note to clients.
What’s making the supply glut even worse? Slowing demand. The International Energy Administration lowered its crude oil demand projections for 2014 to about 200,000 barrels per day from the current 700,000 barrels per day. The IEA forecast is the lowest since 2009.
“Chinese demand seems to be softening and there are severe questions about the Eurozone’s recovery, leading the International Energy Agency to cut its outlook,” Scotiabank Economics wrote.
For most of the 21st century, Saudi Arabia has been willing to be the swing producer for the globe, helping to support oil prices. However, much of the rhetoric coming out of Riyadh indicates that the nation is not inclined to cut production or call for an early meeting, said Tom Kloza, chief oil analyst for GasBuddy.com.
DYI Comments: With oil prices and the world economy declining the Federal Reserve will more than likely attempt to pour additional gasoline (QE) onto the U.S. in an attempt to stimulate GDP growth. So far deflationary forces have overwhelmed the Fed's money printing making them impotent. If oil prices continue to drop this will embolden the Fed's to ramp up another round of QE.
“We have to make sure that inflation expectations remain near our target,” said Bullard in reference to the FOMC’s ongoing war against deflation. “And for that reason, I think a reasonable response by the Fed in this situation would be to…. pause the taper at this juncture.”
Just like that feverish selling broke. Bullard’s stirring cry to non-action ringing in their ears, traders began furiously bidding for shares. Yes, a non-voting Fed board member’s oblique reference to the possibility that the Fed may not completely eliminate its now $15 billion monthly QE program this month marked the lows for the correction thus far.
DYI
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