3 Reasons Why Crude Oil Prices Tumbled on Monday

Oil prices continued to fall Monday due to factors ranging from slowing demand to competitive pressures forcing the hand of producers.
US crude oil
With peak driving season coming to an end in the northern hemisphere, oil prices are losing one of their primary catalysts. | Image: AFP PHOTO / Karen BLEIER / FILES
  • Since the weekend, crude oil prices have fallen by almost 7%.
  • As summer draws to a close and the peak driving season ends, U.S. demand is expected to slow.
  • There are still stockpiles created earlier in the year when petroleum prices were relatively low that are unused across the globe.

Oil prices tumbled on Monday, managing to hit lows last recorded months ago.

U.S. West Texas Intermediate (WTI) crude fell by 1.6% to $39.15 a barrel–a continuation of a steep fall witnessed over the weekend.

WTI has fallen roughly 7% since Friday and nearly 10% since the start of September.

WTI crude oil
U.S. West Texas Intermediate crude fell to below $40 on Monday, continuing a slide that started over the weekend. | Source: Yahoo Finance

Brent crude declined by a similar percentage, falling to just over $42 a barrel.

Oil had been on an upward trajectory since April when WTI collapsed into negative territory. Year-to-date, oil prices are down over 30%.

Here is why oil prices started the week in negative territory.

1. Peak summer demand from the world’s largest consumer is ending

The season of high petroleum consumption in the U.S. is coming to an end as summer draws to a close.

The Labor Day holiday signals the end of peak demand for the year in the U.S. With the world still experiencing an oil glut, global demand for the commodity will take a hit as the United States cuts back.

The summer driving season is additionally ending in Europe, which will further depress demand. With more countries reporting economic contraction, there is little possibility for other markets compensating for the reduced demand in the northern hemisphere.

2. The world’s largest oil importer is pulling back

While China has been buying more oil than usual due to low prices, demand has started to ebb as stockpiles rise.

In August, China imported 12.6% more oil than the same period a year ago. This is changing, though, with China expected to cut purchases in the coming months.

According to Refinitiv Oil Research, oil heading to China in August dropped to 7.93 million barrels from 8.2 million barrels in July. It was also down from the 11.87 million-barrel average in the second quarter.

 

China
China took advantage of low oil prices earlier in the year to build its stockpiles. This is expected to reduce demand in the future. | Source: @aeberman12/Twitter

3. The world’s largest oil exporter is cutting prices

Saudi Arabia has reduced the official selling price for its Asian customers, signaling competitive pressures from other producers. The discounts are the largest Saudi Arabia has offered in the past five months.

The kingdom’s oil giant Saudi Aramco reportedly cut prices for shipments to Asia by a larger-than-expected amount. In the case of light crude oil, which is less expensive to produce and thus more valuable, the Saudis cut the price by $1.40 a barrel to $0.50 below the regional benchmark. The cuts come after Saudi Arabia raised prices for Asia between June and August. Saudi Aramco is additionally offering discounts to the U.S.

The cuts were attributed to softening demand from refiners that still hold large stockpiles.

Oil
Competitive pressures are forcing Saudi Arabia to cut prices for its customers in Asia and the U.S. | Source: @economics/Twitter

Saudi Arabia’s decision will likely have a direct impact on how neighboring countries price their crude. The cuts will have a ripple effect across the board.

Disclaimer: This article represents the author’s opinion and should not be considered investment or trading advice from CCN.com. Unless otherwise noted, the author has no position in any of the securities mentioned.

Sam Bourgi edited this article for CCN.com. If you see a breach of our Code of Ethics or find a factual, spelling, or grammar error, please contact us.

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