Oil prices are continuing their downward trend this morning following yesterday’s drop across the board. As the current price of crude sits below $41.00 we are now in a new bear market, defined as a 20% drop below its June peak. At the close yesterday, diesel settled down $0.0246, RBOB was down $0.0152 as crude also closed lower by $0.77. With crude prices hovering below $41/barrel, this bear market is the result of the same factors that we are so familiar with – oversupply, increased production in the U.S. and OPEC increasing its output as well. Contributing to the supply side of the equation was the weekly EIA data showing an increase in gas stocks going against expectations for this time of the year. When coupled with the stabilization of global factors in Canada, Africa and the Middle East, the overall market continues to feel the downward pressure.
Another factor outside of the fundamental supply/demand economics that can be added to the downward pressure list is the recent performance of the U.S. dollar. As has been written in this blog previously, commodity prices are inversely related to the dollar. Because oil prices are priced against the U.S. dollar, the current dollar strength is contributing to the downward pressure. “The U.S. dollar always has an impact on crude. Dollar strength on crude will provide a stiff headwind for crude oil even if fundamentals on crude are strong,” said one commodity trading analyst. He went on to say, “In this instance with the U.S. rigs building, Nigerian and Canadian oil all getting back online and supplies at record levels, the U.S. dollar strength is not only providing a headwind but helping crude in its current weakness.”