The real reason that oil prices have fallen is that they were too high and needed to adjust downward.
WTI oil prices plunged to almost $45 per barrel yesterday (Figure 1).
Related: U.S. Oil And Gas To Contribute $1.9 Trillion To U.S. GDP By 2035 This market has been largely optimistic over the last year so it would not surprise me to see a return to $50 oil prices in the next week or so.
Oil Prices Are Testing a $45 Floor.
In this case, oil prices fell supposedly because of falling confidence that the OPEC production cuts are working, fears of increasing U.S. shale output, and weakening demand from China.
As it stated in
Saudi Arabia’s Budget Deficit Shrinks By 71% On Higher Oil Prices
State revenues jumped by a similar rate, 72 percent, to US$38.4 billion (144 billion riyals), with oil revenues surging by 115 percent to US$29.9 billion (112 billion riyals).
Higher international oil prices helped Saudi Arabia shrink its budget deficit by 71 percent from the first quarter of 2016 to US$6.9 billion (26 billion riyals) as of end-March 2017.
Non-oil revenues inched up by 1.3 percent to US$8.56 billion (32.1 billion riyals).
Saudi Arabia cut its crude oil output more than it had agreed to with other OPEC members and non-OPEC producers and that became a major bullish factor in oil price developments.
Riyadh plans to close the budget gap by 2020 through privatization, investments, and diversification into renewable energy, to reduce its dependence on crude.
As it stated in
Will Hedge Funds Drive Oil Prices Even Lower?
As the surplus steadily narrows, oil prices should firm up.
In fact, the recent losses in crude prices have the bears on the march.
Andurand Capital reportedly liquidated all of its bullish bets on crude oil in recent days after posting steep losses so far this year.
And the volume of options on $39 oil by August surged to 20 times their normal trading activity.
Put another way, there is a lot more room now on the upside since everyone got out of their bullish bets.