In October, the price of Brent crude oil jumped to a high of $86.70. This was the highest level in more than four years. The reason for the increase was that Iran sanctions were expected to start in November. Therefore, investors expected that an exit from the oil market would reduce the amount of crude oil supplies. A reduction in supplies would then lead the prices to rise.
This month, Iran sanctions kicked off. However, instead of the price rising, it fell and today, the price reached $64.75. From the previous high of $86, the price of crude oil has fallen by more than 25%. When a security falls by more than 20% from the previous high, it is said to be in a bear market.
The reason for the decline are that the world is currently flooded with crude oil. Just last month, a senior Saudi official said that OPEC members were in a ‘pump as much as you can’ attitude.
Yesterday, OPEC released its monthly report that signaled doom for the oil market. The report said that the oil market will see reduced demand in 2019. In economics, a reduced supply coupled with a tight demand usually leads to falling prices.
Perhaps this was the news that Saudi was expecting. On Monday, Saudi energy minister said that the country’s oil company, Saudi Aramco will start reducing supply by more than 500K barrels a day. This led to a sharp short-lived increase in the price of crude. This move was promptly rejected by Russia, which argued that the demand problem was unlikely to happen in 2019. It also prompted a response from Donald Trump who asked the country not to start cutting supplies. He argued that doing so might mean higher oil prices. While the US has huge oil reserves, it also relies on imports from other countries to fill the gap.
In recent weeks, the US has continued to increase the amount of oil it pumps. Data from EIA has shown a continued pace of increased crude oil inventories. This has been confirmed by the data from the American Petroleum Institute (API) which has shown increased stocks. On Friday, data from Baker Hughes showed that rig counts in the US increased by 14. Internationally, they increased by 13. This is a sign that producers are taking advantage of the relatively high crude prices.
