Why Oil Prices Are Lowest They've Been in Months

By Patti Domm

The free-fall in crude prices is unlikely to reverse course without significant signs that the world economy is improving.

Oil, like stocks, fell sharply Thursday as fears of slowing global growth gripped markets, which were also beset by speculation about pending bank downgrades and Europe’s sovereign crisis.

But the price of oil has a separate significance in that it is an important lever on the world economy, and its decline could help consumers.

Crude prices have fallen 30 percent from their March highs as oil production globally rose to a record level in May, according to the International Energy Agency.

The world is now pumping 91.1 million barrels per day, the most ever. OPEC production, at more than 31.5 million barrels in May, is also higher than normal.

West Texas intermediate plunged 3.5 percent Thursday, following government reports of ample supply and domestic production at a 13-year high. WTI finished $3.05 lower at $78.20 per barrel, the first close below $80 since October.

Brent, the international benchmark, fell to $89.23 per barrel, the lowest level in 18 months.

Traders say the months-long decline in oil may have been signaling a slowdown in the economy.

While OPEC affirmed last week that it would hold production at 30 million barrels a day, production of oil elsewhere has increased.

“We’re (the U.S.) probably close to 6.4 million barrels a day, the highest in 13 years,” said Andrew Lipow, president of Lipow Oil Associates. “My unofficial estimate compared to last June, is we’re probably up 800,000 barrels, and that is about a 14 percent increase year over year. It’s huge and it’s being led by North Dakota and Texas.”

He added: “What we don’t talk about very much is the decline in demand in Europe and that is a good 3 percent year on year, which is a significant amount.”

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