Why have oil prices dropped so much? Crude below $40 a barrel

On Friday US crude prices dropped below $40 a barrel. This is the first time that crude has fallen below that level since the financial crisis. Brent oil also dropped to a new six-year low on Friday down to $45.10 a barrel – the lowest since March 2009.

oil well

Oil plunged below $40 a barrel for the first time since February 2009.

Why have oil prices dropped so much?

The latest drop came after a report by Baker Hughes showed that the number of rigs drilling oil in the US has increased. However, there are other key factors at play too.

In a nutshell these are some of the other factors along with information on why they matter:

The OPEC price war

Despite non-OPEC output declining in response to low prices, OPEC countries aren’t cutting back on production. According to estimates by Bloomberg and Reuters, in July OPEC production was at just over 32 million barrels a day, with Saudi Arabia and Iraq producing at record levels.

China

There are concerns that the demand for the commodity will dwindle because of a China-led economic crisis. The latest factory output reading for China was the lowest since March 2009 – the Caixin/Markit manufacturing purchasing managers’ index fell to 47.1 from 47.8 in July.

According to The Financial Times, analysts at Société Générale said that “China has sent shockwaves through global markets and raised numerous questions on the outlook,”

Expectations of the Federal Reserve hiking US interest rates

Another factor believed to be pushing oil down is the current strength of the US dollar. A rising dollar means that commodities priced in USD are more expensive to investors using different currencies.

The US dollar has been rising steadily, not to mention expectations that the Fed will hike rates – set to push the dollar up even more.


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