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Why did crude prices fall?

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Crude prices fell

Sir Isaac Newton was right. Gravity does affect everything. It happened to gold. So, how could crude stay insulated? Currently, you don’t need three digits to write down crude oil prices. In fact, prices aren’t just in double-digits, they’ve decreased to below $60 per barrel. Right now, “Oh my God!” can be heard in two completely different tones from different parts of the world. Let’s take a look at why oil prices fell.

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Why prices fell

There are three main reasons why crude prices fell:

  1. Weak demand – A slowdown in global economic activity led to weak demand. In its monthly report in December, OPEC (Organization of the Petroleum Exporting Countries) projected world oil demand to “grow by 0.93 million barrels per day (or mb/d) to average around 91.13 mb/d. These projections represent a decline of 0.12 mb/d from the previous report.” The main reason for this is the decline in demand in the OECD (Organisation for Economic Co-operation and Development) region. The OECD is a group of 34 countries.
  2. US oil production – The US has become the largest oil producer. Although it’s the largest consumer as well, it needs to import much less than it used to because of a surge in domestic supply.
  3. OPEC production – In its 166th meeting held on November 27, the OPEC nations “decided to maintain the production level of 30.0 mb/d, as was agreed in December 2011.” There were expectations of a supply reduction to restore crude oil prices, but OPEC decided against it.

Impact

As a result of these three reasons and OPEC’s decision, crude oil prices tanked. ETFs also fell—like the United States Oil Fund, LP (USO), the SPDR S&P Oil & Gas Exploration & Production ETF (XOP), and the VanEck Vectors Oil Services ETF (OIH). These ETFs are down 40.4%, 27.7%, and 24.6%, respectively, as of December 24, 2014.

Oil giants like ExxonMobil (XOM) and Chevron Corp. (CVX) are down 7.3% and 9.2% this year. They’re down 10.2% and 14.7%, respectively, from their peaks in July.

With India being an important crude oil consumer, how has this impacted the country? Before answering this question, let’s take a look at India’s oil and gas sector.

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