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Why Oil’s Downward Slide Is No Joke

By Ellen R. Wald, Ph.D.CommoditiesJul 12, 2016 06:52AM ET
www.investing.com/analysis/oil%E2%80%99s-slide-is-no-joke-200141227
Why Oil’s Downward Slide Is No Joke
By Ellen R. Wald, Ph.D.   |  Jul 12, 2016 06:52AM ET
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At the end of last week, the price of oil suddenly dropped 5%. This slide comes on the heels of news that crude oil stockpiles in the United States did not fall enough – only 2.2 million barrels during the week of July 1. This means that refineries used much less crude oil than anticipated for this this early summer season. Gasoline inventories fell less than expected as well – only 122,000 barrels were used when over 300,000 were expected.

This data indicates what world events have been hiding for the past few months – that there is still a global glut of oil and gasoline. Absent new events, the price of oil should continue to slide to reflect this.

Glut in the United States

Americans are driving. They just aren’t driving enough to make a dent in the fundamentally oversupplied oil market and in the massive inventory of stored crude oil. Typically, U.S. refineries draw extra crude oil at this time of year to make more gasoline for the vacation season demand. However, when oil was cheap in prior months, refineries drew more crude oil, meaning they already met today's increased demand months ago. This extra gasoline explains the EIA’s July 1 numbers and exposes the oil glut that global events had been hiding.

Tanker Overload

Satellite photos tracking oil tankers around the world illustrate the oil glut visually. Dots and arrows indicate a traffic jam of super-tankers clogging lanes between the Persian Gulf and China. The worst bottlenecks are visible around Singapore, where ground photographs reveal a parking lot of ships waitingto enter ports in Asia and unload cargoes. The contango situation also exacerbates these traffic jams because it is still cheap enough to keep oil stored on ships while owners wait for oil prices to climb. However, this risks a sudden flood on crude oil into the market and a corresponding slide in oil prices.

Masking the Glut

Global events in Nigeria, Canada, Libya, and Iran have helped hide the oil glut situation so far this summer. The Niger Delta Avengers, a terrorist organization in Nigeria dedicated to destroying Nigerian oil infrastructure, have done significant damage, but not enough to make a serious dent in global oil production. Wildfires in Canada shut down production in the Alberta tar sands, temporarily, but the fire has been extinguished.Hostility between rival producers in Libya resulted in a suspension of Libyan oil exports for several weeks. News of possible strikes amongst Norwegian and Kuwaiti oil workers also lifted oil prices temporarily, though these labor issues were resolved before any serious stoppage occurred. Speculation has magnified the effects of geopolitical, labor, and environmental events and helped push the price of oil higher than it should have been.

Oil’s Current Slide

News that China’s so-called “teapot” (aka independent) refiners are processing less crude oil, alongside news of increased production in U.S. shale oil regions helped push the price of oil lower as markets opened this week. The question is whether this current slide will bring the price of oil down to the low $40s or if some geopolitical, labor, or environmental issue will pop up and hide the glut again.

Why Oil’s Downward Slide Is No Joke
 

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Why Oil’s Downward Slide Is No Joke

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aparantus some
aparantus some Jul 14, 2016 5:18PM ET
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strong dollar is driving oil prices lower just like now with brexit eur and pound fell, as cbs lower rates and stimulus: lowest prices where when ecb expanded qe and fed was on a hike path. funny thing a cbs increase stimulus they get the opposite effect since oversea stimulus causes dollar to appreciate and commodities to fall, i wonder why the cbs don't see this?. maybe hidden agenda?
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Jul 13, 2016 3:25PM ET
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More auto miles were driven this 4th of July weekend than any period in history! This writer has no clue what she is writing about.
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Mark Scott
Mark Scott Jul 12, 2016 2:55PM ET
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the US will not allow it to happen again.. They will do whatever it takes.. im sure a few bombs and ISIS claiming responsibility will be enough.. ***up 0.01% of the supply and tell the people that theres a shortage.. Your saudi mates wont care.. .
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Paulo Grabowski
Paulo Grabowski Jul 12, 2016 2:52PM ET
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Disagree about Norway and Nigeria. The speculative talking abou the strikes in Norway started after oil had peaked, and the Nigeria stuff is still in place (real problem). After all i think 50 is fair for oil at this time...
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Timochin Khan
Timochin Khan Jul 12, 2016 9:21AM ET
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good report, well done..
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Jack Smith
BullyGoat Jul 12, 2016 8:35AM ET
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Tankers are a lesser known producer of crude oil. They have posi-tronic lithium ion crude oil generators that convert sea water into crude oil. Beware the tankers!
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Chris Handke
Chris Handke Jul 12, 2016 8:27AM ET
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The reason the glut isn't disappearing is because imports have been crazy high. However, inventories in places that ship us oil are falling. So what's that tell you? This won't keep up forever. But hey why let the truth get in the way of a good misleading hit-piece article that is becoming the norm for this terrible author.
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aparantus some
aparantus some Jul 12, 2016 5:35AM ET
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tanker overload is not a myth they just waiting to enter the port for a better price, you see that in any port..Tankers are a trading platform more than anything else
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