Here's The Real Story Why Oil Prices Plunged

November 07, 2014

The U.S. oil boom is one factor of many.

[This article originally appeared on HardAssetsInvstor.com and is republished here with permission.]

The Department of Energy reported this morning that in the week ending Oct. 31, U.S. crude oil inventories increased by 0.5 million barrels, gasoline inventories decreased by 1.4 million barrels, distillate inventories decreased by 0.7 million barrels and total petroleum inventories decreased by 2.4 million barrels.

After hitting fresh multiyear lows on Tuesday, crude oil bounced back today following these latest inventory figures. Unconfirmed rumors of a pipeline explosion in Saudi Arabia also lent some support to prices.

Today's bounce notwithstanding, the big story in the oil market continues to be the "glut" in the market. Over the past several weeks, there have been countless articles talking about the oversupplied market, but very few of them explain how this glut suddenly developed between June, when Brent was trading above $115, and now, when it's trading in the low-$80's.

Some have pointed to the U.S. production boom, while others have blamed the Saudis for starting a price war. In many cases, these stories don't paint the entire picture, or worse, they are entirely inaccurate.

U.S. production has been surging for three years now. In 2012, output grew by 850,000 barrels per day; in 2013, it grew by almost 1 million barrels per day; and this year it is on track to grow close to 1.1 million barrels per day.

Yet oil prices weren't "crashing" in that three-year period. Just as we wrote above— prices were trading as high as $115 just a few months ago. Thus, we can conclude that it wasn't the U.S. oil boom in and of itself that caused oil's decline.

 

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