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Lower oil prices

Author(s): James Hamilton

Is the recent steep decrease in the price of oil demand or supply driven?

From Econbrowser:

For the last 3 years, European Brent has mostly traded in a range of $100-$120 with West Texas intermediate selling at a $5 to $20 discount. But in September Brent started moving below $100 and now stands at $90 a barrel, and the spread over U.S. domestic crude has narrowed. Here I take a look at some of the factors behind these developments.

 

Price of crude oil in dollars per barrel, Jan 4 2005 to Oct 6 2014.  Data source: EIA.

Price of crude oil in dollars per barrel, Jan 4 2005 to Oct 6 2014. Data source: EIA.

 

Price of Brent minus WTI, Jan 4 2005 to Oct 6 2014.

Price of Brent minus WTI, Jan 4 2005 to Oct 6 2014.

Prices of many other industrial commodities have also declined over the last year, silver and iron ore more than oil. One factor has been weakness in Europe and Japan, which means lower demand for commodities as well as a strengthening dollar. The decline over the last year in the price of oil when paid for with Japanese yen is only about half the size of the decline in the dollar price.

 

Percent change in dollar prices of selected items, Oct 2013 to Oct 2014. Data sources: Oil-Price.net, Wall Street Journal and x-rates.
Brent -18.2
WTI -16.7
gold -3.4
silver -18.7
platinum -8.1
palladium 10.5
antimony -11.3
copper -7.1
lead -1.3
iron ore -40.0
zinc 21.2
euro -6.7
yen -8.5

In terms of factors specific to the oil market, one important development has been the recovery of oil production from Libya. The latest Monthly Oil Market Report from OPEC shows Libyan production up half a million barrels per day since this summer. Libya is hoping to add another 200,000 barrels/day this month and 200,000 more by early next year. This would be a significant addition to the market, though the situation in Libya remains quite unstable.

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