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Why The Price Of Crude Oil Is DroppingNovember 19, 2012 | Filed Under Commodities,Energy,Investing News,Investment

Oil continues to fall. Analysts and industry experts have their opinions about why.

History, however, tells us that sometimes nobody really knows. Everyone is making his

or her best educated guess but, in the end, it is all theory and difficult to quantify.

On Sept. 14, crude oil closed at a high of $98.94, leading market analysts to believe that

it was poised to reach the $100 mark. At the time, economists, as well as Washington

politicians in the midst of an election year, worried that higher prices would put a

damper on economic growth as prices at the pump would continue to rise.

On that day, Reuters reported that rising crude prices were the result of actions in the

currency market as well as reaction to the federal government'sannouncement of QE3.

Since that time, however, oil has retreated. As of Oct. 31, it was down to $86.23, a

nearly 13% decline since the September highs. Why has oil dropped so dramatically in

such a short period?

Superstorm Sandy

Superstorm Sandy made landfall on Monday, Oct. 29. From the Friday before landfall to

the Friday after, thespot price of oildropped just over 1%. Sandy has only served to

place additional pressure on the commodity causing supply and distribution disruptions.

While reports of two-hour waits for gasoline amid short supply flood the media, some

analysts expected a sharp rise in both oil and gas prices.

Because two refineries in the northeast, responsible for processing more than 300,000

barrels of oil per day, are shut down, and others are operating at reduced capacity, the

supply of oil was decreased. Demand, however, was affected more than supply. As

repair to the infrastructure takes place and consumption returns to normal, prices should

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7/30/2019 Why the Price of Crude Oil is Dropping

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stabilize.

Technical Correction

Oil traders, anticipating intervention by the world's banks to stimulate economic

growth,drove the price of oil up. As some anticipated, however, the euphoria has to end

sometime. When traders realize that intervention has done little so far, they rethink their

outlook. ITG Investment Research theorizes that the stimulus hope bubble burst,

sending prices dropping.

On Sept. 17, oil dropped more than $3 in less than a minute, leading some to describe

the fall as something similar to a flash crash. Experts disagree about the reason such an

irregular drop took place but some blame algorithmic trading for the fall. Other theories

include a fat-fingered trader and pending expiration of the October contract.

Too Much Supply

When it comes to oil, not only is there too much supply, there is not enough demand.

World economies are struggling. When the economy slows down, so does the demand

for gasoline, diesel and jet fuel. People travel less, companies ship less and consumers

curtail their driving habits to save money.

The Middle East

Tension in the Middle East often takes the blame for oil market volatility. Rising tensions

in the late summer months created fears of supply shortages, causing prices to rise. As

those tensions proved to be mostly unfounded and the Middle East remained relatively

quiet, traders may have covered their commodity hedges.

The Bottom Line

Theories abound about why theoil market rises and falls. Energy traders know that

commodities markets are volatile by nature. To look at a long-term chart of oil, investors

find rises to $146 a barrel in 2008, which then fell sharply soon after. The oil market is a

worldwide market and sometimes the cause of a rise or fall in price has no clear,

discernible, single reason.

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