Key Takeaways:
- Oil demand decreased causing rapid price fall in the market.
- The rise in USD value following Trump’s victory contributed to the rapid oil price drop.
- As more and more NEVs are adopted, oil consumption is rapidly dwindling in China, one of the top oil consumers of the past.
As the tensions in the Middle East die down and the price of the dollar rises, the oil industry is currently facing demand issues. This led to a notable decrease in the price of the oil. The West Texas Intermediate fell toward $68.04 a barrel while Brent crude is barely adrift above $72. One of the factors that seriously contributed to this is the lack of demand for oil from major buyers like China.
USD Rise & Oil Price
The US Dollar has risen considerably following Trump’s victory in the US Presidential Election. This is one of the major factors that contributed to the price drop of crude oil. Oil and price are deeply tied to each other. The price actions in one venue can cause a reaction in the other. It can either be positive or negative.
If a country wants to buy or sell crude oil, then they do so through the petrodollar system. It allows them to trade crude oil with USD. The concept behind the system was first put forward in the 1970s. As the energy sector is a main contributor to the US GDP, the oil’s high decline has benefited the USD to a great extent.
As Trump became victorious, the USD reached its highest level in 2 years. As the USD is the currency used to trade oil throughout the world, it has undergone a significant price drop. This has made it extremely expensive for buyers using different currencies to purchase the commodity. This has resulted in a decrease in demand for oil and hence, the sudden price drop.
Rapid Oil Demand Slump In China
China was one of the leading consumers of oil in the world. This has slowed dramatically amid the first half of this year. China’s oil demand is progressively less because of the rapid adoption of new energy vehicles (NEVs), high-speed rail (HSR) networks, and the housing market slump.
As various policies were adopted by the government to boost NEV sales, the gasoline demand has been reduced by a lot. China’s HSR network also played a major role in the reduction of oil consumption. The International Energy Agency (IEA) has provided a report that an additional 300,000 bpd of oil would have been consumed by China if it weren’t for the HSR.
China’s housing market slump and liquified natural gas (LNG) truck sales have also negatively impacted oil consumption. The floor space of new homes has decreased by almost 60% in the last 5 years. This has resulted in less consumption of diesel that should be used in various construction works and transportation.
Aftermath of the Price Drop
As the oil price dropped, it had a significant impact on various marketing giants in the oil industry. Brent Crude futures dropped by 6 cents to $72.22 per barrel. The US West Texas Intermediate (WTI) also witnessed a fall. Now, their barrels are selling at $68.30 per piece. The EIA has boosted its oil production, which has now reached 13.23 barrels per day. This uptick is going to increase in the coming year.
This increase in the supply of oil is likely going to going to have a negative impact on the coin’s price in the coming days. China’s subdued demand along with the rapid rise of US dollars weigh heavily on the oil market. The higher the dollar climbs, the higher the hindrance to international trade. This dynamic is going to strongly influence the upcoming oil policies as countries struggle to keep up with the oil price fluctuations in the market.