The Commodity Investor: Get To Know Oil Market’s Two-Part Story

October 03, 2014

U.S. oil boom has changed the oil market.

 

Oil prices have seen sharp drops over the last few weeks, with no visibility as far as how low they will go. In this week’s column, The Commodity Investor examines the demand/supply dynamic to determine where prices are heading in the fourth quarter and beyond.

A Tale of Two Crudes

While the crude oil market is a global market, prices are determined on a regional basis. Specifically, West Texas Intermediate (WTI) is used to price crude products in North America while Brent is used mainly for Europe as well as other parts of the world (such as the Middle East and Asia).

Brent prices have been in a downward spiral since the summer months of June and July, when benchmark prices reached a high of $115 per barrel. Since then, prices have dropped to $95 per barrel, representing one of the sharpest declines in the last three years. Earlier this year, Brent prices were trading within a tight range of $105 to $110 per barrel price band.

Brent Crude Oil

Brent

To be sure, August is always a weak month of economic activity worldwide, as many factories and service providers are on holiday. But September is usually a month of strong economic activity, and any weakness seen in August is usually compensated for in September. What’s different this time is that prices kept dropping through the month of September and now into the month of October as well.

What gives? There are several key factors that are responsible for this price weakness the Brent market is going through. First, one of the biggest contributing factors to the Brent pricing mechanism is economic activity and demand from Asian countries and customers, who represent one of the biggest consumer blocks in the world.

 

Find your next ETF

Reset All