Why Oil Prices Just Fell to Their Lowest Level in Five Months

U.S. oil prices have been on a downward spiral recently, and Wednesday’s session perpetuated that dismal narrative. West Texas Intermediate (WTI) – the domestic price benchmark for crude oil – logged its worst close since January and therefore one of the worst closes of 2019.

Investors became particularly panicked when Wednesday’s enormous loss officially put WTI prices in a bear market, which energy analysts define as a 20% decline or more from oil’s most recent high. With prices now down about 22% from their most recent peak at $66.30 on April 23, market participants want to know exactly how U.S. energy companies and agencies plan to remedy the negative supply-demand picture currently ravaging oil prices.

Here’s an in-depth look at oil’s tough loss Wednesday – and how it fits into the broader energy picture…

The News

WTI prices plunged after the U.S. Energy Information Administration (EIA) released its weekly domestic supply update, which showed an enormous increase in oil stockpiles. The data showed that supplies increased by 6.8 million barrels last week. That marked the second-largest weekly increase of 2019 behind the week ended April 26, which showed a rise of 9.9 million barrels. Accounting for last week, the total commercial supply of U.S. oil sits at 483.3 million barrels, roughly 6% higher than the five-year average for early June.

The data shocked analysts, who predicted an overall decrease in inventories. Analysts surveyed by S&P Global Platts – the premier U.S. provider of energy analysis – forecasted a weekly decline of 1.7 million barrels. Matt Smith, ClipperData’s director of commodity research, said U.S. supply now hovers near its highest levels in nearly two years and that the drop in refined product demand has also helped paint a bearish portrait of the oil markets. He explained: “A big drop in implied product demand has spurred on further bearish data points, with large builds to both gasoline and distillates.” 

How Investors Reacted

The weekly report scared energy investors into a selling frenzy, dragging the front-month WTI futures contract for July delivery down 3.4% to $51.68. That was the lowest close since Jan. 7 when the price settled at $50.42.

Prices for Brent – the internationally recognized benchmark for oil – experienced less volatility by declining just 2.2% on the day to $60.63. Brent’s settlement doesn’t yet place it in bear-market territory, but it’s still dangerously close – prices are now down over 18% since their recent April peak.

Many prominent oil stocks also took a hit, with four of the S&P 500’s worst performers being oil companies. Those included Cimarex Energy Co. (XEC), Occidental Petroleum Corp. (OXY), Noble Energy Inc. (NBL), and ConocoPhillips (COP). They respectively fell 5.4%, 4.6%, 3.5%, and 3.4%.

The Bigger Picture

It’s not often that the stock market and oil prices move in lockstep since their underlying fundamentals vastly differ from one another. A 2008 study conducted by the Federal Reserve Bank of Cleveland showed no statistically significant relationship between oil and the S&P, with Barclays also observing that the correlation has only been about 25% over the last two decades or so.

But while oil’s been much more volatile than the S&P over the last month, they certainly appear to be moving in the same direction. The S&P and WTI are down 3.7% and 22%, respectively, since the latter’s peak on April 23. That’s not a coincidence considering their mutual decline can be attributed to the same two causes of trade-war concerns and lackluster economic data, while the additional third factor of rising U.S. supply is what’s making oil more volatile than stocks. Smith harped on this problem in an interview with MarketWatch, saying how “broader economic sentiment has turned south in the last month or so, and crude has been tagging along for the move lower in equities—further juiced by the U.S. inventory build.”

The fourth factor about to come into play for oil markets is the upcoming OPEC meeting, which will dictate the global supply picture moving forward. Sentiment surrounding the meeting remains positive, as analysts expect the cartel and its allies to cut production. The monkey wrench, though, is Russia and its request to postpone the meeting from the original June 25-26 dates to early July.

A meeting delay ostensibly means a production cut delay, a problem that would leave global supply at its currently elevated levels for an extra month or so. That could drag WTI prices deeper into bear market territory, perhaps even below the psychologically important $50 level.

Looking Ahead

Wednesday’s decline perfectly encapsulates how oil is a historically volatile marketplace dependent on a variety of economic and geopolitical factors. That being said, investors can always make money playing oil’s huge swings during any given trading session. Since the futures market is incredibly risky for average retail investors, they may want to consider buying prime oil stocks on the dip. These are far more liquid investments than futures contracts and can be averaged down on a long-term basis should oil price volatility continue.