Why Are Oil Prices Falling? Here Are Four Reasons Crude Prices Continue To Trend Lower

Oil prices tumbled to a six-year low Monday, driven by renewed fears of oversupply and a surging U.S. dollar. Crude prices were also weighed down amid U.S. negotiations toward a possible nuclear deal with Tehran, which would allow more Iranian oil exports into an already oversupplied global oil market.

Although oil briefly rebounded in February following a 60 percent drop in prices from June to January, U.S. crude dropped to less than $43 a barrel Monday to as low as $42.85 for the first time since 2009. West Texas Intermediate crude, the benchmark for U.S. oil prices, lost 96 cents to close at $43.88 a barrel, for April 15 delivery on the New York Mercantile Exchange. Meanwhile, Brent crude, the benchmark for global oil prices, hit a six-week low of $52.50 in intraday trading and then dropped more than 2 percent, to close just above $53 a barrel for April 15 delivery on the London ICE Futures Exchange.

Here are four main factors driving oil’s sharp decline this week:

1. Strong U.S. Dollar

The strength of the U.S. dollar was the main driver for oil's decline Monday after the U.S. dollar index gained more than 3 percent last week, as the greenback soared to a 12-year high against the euro Friday. “It’s a market under tremendous pressure, and the dollar has been the key driver for everything, because when the dollar is strong, the value of commodities fall,” Jeff Grossman, president of BRG Brokerage Inc., said from the floor of the New York Mercantile Exchange.

Global commodity prices are usually quoted in dollars and are likely to fall when the U.S. dollar is strong. Consistent with this, the surge in the U.S. currency in the second half of 2014 coincided with a sharp fall in the leading commodity indexes, Julian Jessop, head of commodities research at Capital Economics, said in a research note.

2. OPEC: U.S. Output Could Take Hit

Another factor weighing on oil prices Monday: OPEC. U.S. oil output could be negatively affected by the end of the year due to low oil prices, the Organization of the Petroleum Exporting Countries warned Monday. Lower global oil prices could also affect marginal barrel output from unconventional sources, such as shale, OPEC said.

“Tight crude producers are aware that typical oil wells in shale plays decline 60 percent annually, and that losses can only be recouped by drilling new wells,” OPEC said in its monthly Oil Market Report Monday. “As drilling subsides due to high costs and a potentially sustained low oil price, a drop in production can be expected to follow, possibly by late 2015.”

3. A Global Oil Glut

Crude futures declined last week on concerns global oversupply is rapidly filling oil stockpiles. Total oil production in 2015 is expected to rise to 9.35 million barrels per day, slightly higher than the 9.3 million barrels per day forecast last month, the Energy Information Administration said last week in its monthly short-term energy outlook.

Separately, oil inventories rose more than expected for the week ended March 6, marking the ninth consecutive week of a higher total than at any time in at least 80 years. U.S. commercial crude oil inventories rose by 4.5 million barrels from the previous week, the EIA said Wednesday. At 448.9 million barrels, U.S. crude oil inventories are at the highest level for this time of year in at least the last 80 years.

4. Iran Nuclear Deal Could Add to Oversupply

U.S. crude was also weighed down Monday as negotiations toward a possible U.S. nuclear deal with Tehran advanced, which could allow more Iranian oil exports. The deal would remove Western sanctions against Tehran and investors fear it could affect a global oil market already facing oversupply.