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The Price of Oil Is Crashing Despite the Trump Bump

Mar 20, 2017

Oil is hurting.

Coming into Monday, prices for oil have fallen seven of the last 10 sessions, leaving the cost of a barrel back below the $50 mark. The losses have stymied a modest recovery following a huge tumble that saw prices fall from well over $100 a barrel in May 2014 to less than $30 by January 2016.

The price of oil was down again on Monday.

Oil has traditionally been a major barometer for the U.S. and the world economy. And that makes oil's fail a problem for Donald Trump. Stocks have traded up on the belief that Trump's policies will provide a major bump to the economy. The price of oil, though, seems to suggest that that bump may not be coming as soon as stock market investors think.

But the drop in the price of oil may be more a factor of the new math of the crude market, and less about a signal where the economy is headed.

Part of the problem for oil producers is that there is an increase in supply. Global oil supplies rose by 260,000 barrels a day last month, bringing the total to 96.52 million barrels a day. U.S. producers are the culprits for the increase, which has caused domestic crude oil storage figures to surge recently. In total, the U.S. has 528.4 million barrels in storage, 7% higher than a year ago. And that excess supply doesn't seem to be going away anytime soon. The U.S. is pumping out nearly 9.1 million barrels a day, the largest total in over a year. By comparison, Russia and Saudi Arabia produced 11.48 million and 9.98 million barrels a day in February, respectively.

To try to counteract the increase in U.S. production and drive up the oil prices, OPEC, Russia, and 10 other key non-OPEC countries made an agreement late last year to cut production for the first half of this year. The agreement worked to a certain extent, with prices rising up to and hovering around the $55 mark for the past few months. But the increase in price has also given U.S. producers a reason to pump out more oil, sending oil prices back down.

Nonetheless, for President Trump, the oil slump could throw a monkey wrench into his plans for the economy. A huge part of his jobs plan has been infrastructure, with the energy industry being a crux of that. If prices remain low, oil producers won’t have much incentive to really ramp up production and hire more staff. OPEC and other countries can afford to produce cheap oil (even if they don’t like it) because they have low break-even points when it comes to oil production. U.S. companies, though, don’t have that luxury. It’s more expensive to mine U.S. oil than in other places around the world, not just because of labor costs, but also because the type of oil coming out of the ground is different.

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