Oil Price Plummets As U.S. Supply Grows; Check Out What It Means For Your Wallet

As of 1:00 PM, March 9, the price of oil in the United States (WTI) has fallen 6.7% since the opening of trading the previous day. The price of WTI has dropped to its lowest since November 2016, before the last OPEC meeting when OPEC and partnering countries agreed to an extensive production cut.

The reason for this sudden drop is investors had an expectation that the crude oil oversupply crisis was dissipating. There seemed to be a high level of adherence to the OPEC—Non-OPEC production cut agreement through February, there were no significant drops in demand and the estimated increase in U.S. crude oil stocks averaged 3.4 million barrels for the week ending March 3. Moreover, that estimate was skewed by one outlying forecast, so excluding API’s forecast the average estimated increase was 1.2 million barrels.

However, during one of the industry’s largest gatherings (CERAWeek in Houston), news came that Russia’s production cuts for February were not as extensive as previously thought. This alone fueled uneasiness about Russia’s intentions to follow through with planned cuts over the six-month agreement, let alone any agreement extension.

The news that really sent the price of crude plummeting was the U.S. Energy Information Administration’s (EIA) release of data on Wednesday showing that U.S. crude oil stocks had actually increased by 8.2 million barrels for the week ending March 3. This was a difference of 4.8 million barrels more than the average forecast.

Analysts and investors had priced in much more positive expectations. The news in the first half of this week indicated to many that there was over exuberance and that their pricing had been wrong. The biggest question now, is whether this is a blip or a recalibration . Possible negative signs that investors should look for include: 1) Russia and others continuing to overproduce and failing to live up to their agreement and 2) U.S. oil producers continuing to increase production and exacerbating the overstock.

One piece of potentially good news is that gasoline stocks dropped 6.6 million barrels last week. Over the next few weeks, as U.S. refiners will conclude refinery maintenance and will transition to their summer production methods and the warm weather driving season arrives, crude stocks may dissipate. Refineries may draw more crude oil to produce gasoline and meet summer demand.

As for consumers, gasoline prices are not expected to decrease from this drop in the price of crude because gasoline stocks have actually decreased (a decrease in storage) and refineries at this time of year are in transition to summer blend gasoline. This transition always keeps prices elevated. There is a small possibility that excess stocks of crude in the coming months will eventually flow into an oversupply of gasoline that could lower prices at the pump.

Source: Forbes