Statistics versus Reality: Crude Oil Prices Hit 2009 Levels
Crude oil prices fall
This series analyzes crude oil prices and fundamentals. For an in-depth fundamental look at oil and gas and related companies, sectors, and drivers, please refer to our Energy and Power page.
NYMEX-traded WTI (West Texas Intermediate) crude oil futures contracts for September delivery fell by 4.18% and settled at $43.08 per barrel on Tuesday, August 11, 2015. Prices fell due to pessimistic sentiments of an extension of the long-term bear market. WTI tracking ETFs like the United States Oil Fund LP (USO) and the ProShares Ultra DJ-UBS Crude Oil (UCO) also succumbed to the mammoth fall in US crude oil prices in Tuesday’s trade. They fell by 2.69% and 5.63%, respectively, at the close of trade yesterday.
Yesterday, crude oil prices reacted to the devaluation of the Chinese yuan. The Chinese government devalued the yuan with the intentions of boosting export-driven economic growth. So, why did crude oil prices fall? This signals that the slowing Chinese economy could take longer to recover than anticipated. This could slow down the crude oil imports from China. The devalued currency also makes it expensive to import crude oil.
Secondly, the US Dollar Index appreciated against the basket of currencies. It adds a more pessimistic catalyst to crude oil prices. Crude oil is a globally traded commodity. So, it’s dollar denominated. The appreciating US dollar makes crude oil expensive for oil importing nations.
The monthly report released by OPEC (Organization of the Petroleum Exporting Countries) detailed that its production hit peak levels from July 2012. OPEC produced 31.5 MMbpd (million barrels per day) of crude oil in July 2015. Iran boosted the production despite a fall in the output from Saudi Arabia.
The data compiled by Bloomberg reported that North American oil and exploration companies issued $62 billion of stocks and bonds in 2015. Most of the bonds and stocks are trading below the issue value. They’ve lost more than $6.1 billion in market value. That’s about a whopping 10% of the total value.
We should also remember that despite this news, the crude oil market is already flooded with record production from the US, Russia, Saudi Arabia, Iran, and Iraq in the oversupplied market.
Likewise, the summer driving season’s demand is nearing an end. The beginning of refineries’ maintenance season and record inventories from the Middle East to the US will add oil to the fire in the crude oil market.
The Bloomberg Commodity Index fell for the second day in a row. It’s trading close to the 13-year low. This catastrophic fall in crude oil prices impacts the margins of integrated oil companies like Occidental Petroleum (OXY), Chevron (CVX), and ExxonMobil (XOM). Combined, they account for 32.19% of the Energy Select Sector SPDR ETF (XLE). Chevron and ExxonMobil have posted the lowest profit in several years. Oil prices fell almost 20% YTD (year-to-date) due to mammoth supplies.
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