The Decline of Oil

oilEarlier today, oil fell another 6% to $37.50 a barrel, the lowest level since February of 2009.  Since June 2014, a massive supply glut has wiped out two-thirds of oil’s value.  This latest plunge has taken its toll on the stock market.

In recent years, OPEC has been held in a big divide between two different factions, one led by Saudi Arabia and its Gulf allies who can deal with cheap oil and other countries such as Nigeria and Venezuela that need higher prices to stimulate their economies.  Yet with Saudi Arabia firmly in control of decision making, near-term oil recovery doesn’t seem too likely.  The oil crash began last year after the American shale oil boom flooded the market with excess supply.  OPEC has been aggressively pumping oil to steal back market share, instead of cutting supply to boost prices.

The International Energy Agency said that oil inventories have swelled to nearly 3 billion barrels, a record-breaking number.  The excess has gotten so bad that there’s been a “traffic jam” in the US Gulf Coast of oil supertankers waiting to be offloaded.  Oil prices haven’t been helped by the less-than-stellar economic environment around the world; the US economy has been enjoying only a modest recovery from the Great Recession, and many other parts of the world, such as China, have been slowing down.

China’s economic slowdown has been a big problem for raw materials, including oil.  Explosive growth in China helped to fuel a strong demand for oil and even led to predictions that crude would continue to soar to $200 a barrel or more.  Yet to everybody’s surprise, the opposite happened, with crude breaking below $38 a barrel in late August.  This is of course good news for American drivers, with gas prices potentially falling below $2 a gallon for the first time since 2009.  Yet this is bad news for energy companies, which have all suffered steep declines in share prices and profits.

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