If you've followed the financial markets over the last year, you know that crude oil has been one of the top stories in world headlines. The price of oil fell through 2015 and notched 13-year-plus lows in late January 2016. But volatile swings in the price of oil aren't anything new. Depending on your timeline of the Great Recession, crude oil spiked to extreme highs in the middle of that fiasco, reaching levels above $150/barrel. Now eight years later, its price is hovering around $30.
Why has crude oil dropped so much? Here are some of the geopolitical and demand/supply factors affecting the price of crude oil as well as some details on accessing crude oil futures. The price of crude oil since 2012 is shown on the graph below:
1) US Now Produces More Crude than Saudi Arabia (and Russia’s not far behind)
Until recently, Saudi Arabia was the number one producer of crude in terms of absolute barrels of output per day. However, with the application of new technology, the United States is now actually producing the most barrels of oil per day of any country on earth. Back in 2008, the US was producing about five million barrels per day. Now, the US is producing roughly nine million barrels of oil per day - a level last seen in the early 1970s.
Russia is the number three oil producer and has also steadily increased its output after reorganizing and optimizing their equipment and methods after the fall of the Soviet Union.
2) Stable or Declining Consumption Reduces Demand
Because consumption in the United States is approximately 19 million barrels per day, the ramp-up in production has greatly reduced the country’s reliance on imported oil. Coupled with low levels of worldwide economic growth since the Great Recession, global demand for crude oil has not been increasing. Exacerbating the problem are reports that indicate worldwide crude oil storage facilities are at or near capacity.
3) OPEC has Less Flexibility in Production Levels
In previous periods of under-and-over supply, the world's largest producers -- coordinated by OPEC -- often adjusted production levels to help prevent price extremes. However, conflicts in the Middle East and elsewhere have thrown some of these sensitive relationships into turmoil - creating far less cohesiveness among the important players. Currently, two of the world's biggest producers are arguably on opposite sides in the Syrian war (Russia and Saudi Arabia). The United States is also involved in that conflict, and has supported sanctions against Russia for annexing parts of Ukraine.
Because oil revenue is used by exporting countries to finance their international adventures, they can’t temporarily stop selling oil and forgo current income in order to boost its price.
There have been rumors suggesting that Russia and OPEC are in discussions to cut production. The question now is whether or not one believes these nations can successfully negotiate and execute an agreement. That uncertainty is contributing to the increased volatility in oil.
If you want to learn more about trading crude oil futures, a great series on the tastytrade network titled Futures Measures is a great resource.
Pete Mulmat, the host of the show, has decades of experience in the field and recently offered his insights on the topic.
If you have any questions or comments on oil (or other futures products) we hope you will reach out at firstname.lastname@example.org or leave a comment below.
We look forward to hearing from you!
Sage Anderson has an extensive background trading equity derivatives and managing volatility-based portfolios. He has traded hundreds of thousands of contracts across the spectrum of industries in the single-stock universe.