In the beginning of the year, oil prices witnessed smooth sailing. This was largely thanks to a chilly winter and escalating geopolitical tensions, which helped to buoy prices. However, the favorable demand-supply conditions, which once led crude oil prices to trade above the triple-digit mark, are now waning.
Last week Brent oil slumped to a two-year low of $96.72, while West Texas Intermediate (NYSE: WTI) futures slipped to $90.43 – the lowest level since May 1, 2013. Slowing global demand on the back of rising supplies is believed to be the main culprit for bringing oil prices back to the double digits, which had crossed above $115 not so long ago in June. In fact, Brent oil is down roughly 11% in the third quarter (read: Play an Oil Price Drop with These Inverse ETFs).
What's Behind the Slump?
Global slowdown primararily in Europe and China is believed to be the cause of dwindling demand. European manufacturing index fell to 50.7 in August – the lowest level in 13 months. Europe is already reeling under deflationary pressure and slowing growth. Making things worse, manufacturing activity is also slowing in the second largest oil consuming nation – China.
Moreover, the U.S. government's Energy Information Administration (AMEX:EIA) and the Organization of the Petroleum Exporting Countries (OPEC) also recently cut their forecast for oil demand following lackluster growth in these nations. Paris-based IEA also lowered its prediction for global oil demand.
While, the situation is worsening on the demand front, we have solid oil supplies. The EIA recently reported that U.S. crude oil production increased by 3 million barrels per day between January 2011 and July 2014 – exceeding the global unplanned supply disruptions of 2.8 million barrels per day. Rising oil production is supported by the shale gas boom which has created a huge surplus in the Atlantic Basin and Asia (read: Play the U.S. Oil Boom with These Energy ETFs).
Further, a stronger greenback also contributed ...
More...