Oil Prices Drop Due to Strong Dollar, Increasing Supply, and Low Storage Capacity

Oil Prices Drop Due to Strong Dollar, Increasing Supply, and Low Storage Capacity

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The US crude prices dropped around 3% to a six year low, and it led to the fall of oil prices on Monday. With dollar hitting fresh highs, and oil storage capacity running low; it was bound to happen.

In early trading on Monday, the US crude fell to its lowest since 2009, at $43.57, and rebounded to $44.34 by 0335 GMT, still at a low of around half a dollar after the last settlement. At that juncture, Brent had been trading at $54.32 per barrel, low by 35 cents. Traders felt that the diminishing storage facilities for excess oil and strong dollar were the reasons of falling oil prices.

China has benefitted the most by the falling oil prices by building up strategic petroleum reserves. That was the reason its imports have been pushed to record highs despite diminishing economic demand. However, economic analysts believed that additional storage spaces could be developed by China only later this year.  An analyst with an energy consultancy FGE, Wendy Yong, has opined that China might build a stock of crude due to its falling price, but stock piling of strategic petroleum reserves (SPR) would be hampered by the lack of storing capacity during this year. However, in anticipation of starting another SPR site during the year, the import of crude might pick up later during this year.

The storage capacity of the U.S. has also run low. The International Energy Commission’s comments that the U.S. would soon be without empty tanks required to store crude, and an estimate that global supply had increased by 1.3 million barrels per day have impacted the global sentiments bearishly. More oil wells that have been closed due to harsh winter are likely to open soon in the U.S., and it might deteriorate the situation.