Why is the oil price falling?

People say it's supply and demand, but is it really? About 3 months ago, petrol was 拢1.17 a litre, and now it 92p a litre. Could the current economic crisis really have cut demand this much in a couple of months?





I'm finding it hard to get my head around this. Why is the oil price falling?
The facts seem contradictory, good obsevation, the explanation makes for heavy reading...





Oil prices are falling so dramatically because of 3 factors:





1) Appreciation of the US dollar


The price of oil is affected by the relative value of the US dollar versus other currencies. The US dollar was previously losing a lot of value because of tough market conditions, but when it got to the point of becoming a full-blown crisis, the US dollar won favor again as a safe-haven in a world full of currencies that have seen multiple dramatic crashes in their values. In comparison to a lot of the world, investors still prefer familiar US government debt instruments as the continued flight to quality shows.








2) The bursting of the Oil-price bubble


There was a widely reported analysis by Goldman Sachs predicting that at the rate of growing demand for oil and tightening supply and inventories, that in the near term the price of oil was likely to reach $100 as a price target. They took into consideration the data available at the time. Instead of slowly approaching that target, the oil markets shot right past it and new investors saw it as an escape from the declining stock markets since the oil prices had upward momentum. Many analysts could tell that the factors that predict oil prices had already been priced in to oil markets and were being exceeded. However, many investors continued to contribute to a speculative price bubble. People wanted in on the gains from rising oil prices. By the peak of $147 per barrel of oil, few were able to justify those prices. The falling economy was one of many factors that helped pop this oil price bubble.





3) Reduction in expected demand


Expectations of the future price of oil and future demand were affected by the sudden economic shift that had many commentators talking about the next Gread Depression. Even by more cautious prognosticators, the future worldwide demand for oil was expected to fall in the coming years, and this contributed to a flight away from oil. Not only had expected demand decreased in the world economy, but there was another factor. There had been ';demand destruction'; through the introduction of new technologies and changed habits. As people focussed on working closer to home and hybrid electric cars became more popular, oil demand was lowered in many significant ways that lowered demand for oil.








Therefore it was not just the economic crisis, but it was an important factor that affected currency values as Dollar-denominated assets became a safe-haven and expectations for future demand fell. As mentioned there was also an earlier oil-price bubble and there was demand-destruction.














Why is the oil price falling?
I think it's fallen for 3 reasons that all work in the same direction.





1. Demand has been reduced but OPEC has met twice now to cut production, so I agree that reduced demand should have a more minimal effect on the price due to the production cuts.





2. Stronger dollar relative to other currencies due their own market instability has actually raised our purchasing power. (strange but true, the dollar has been doing well through the crisis even though we've created more money and increased it's velocity.)





3. With the credit crunch the market speculators have less money to try and play the middle man game with. Essentially, their are people who buy and sell commodities without ever actually buying or selling the commodity itself; they only trade paper sales. These people artificially inflate the commodities market and drive up the price (and make money in the middle). If they're having money constraints; they can't play the middle man game.





Just my two cents.









Summarize


1. Crude barrels 50% of price less than 1 year ago


2. Everyone is being conservative - driving less, driving more efficient cars


3. Alternative energy is a real thing now, hydrogen technology, ethanol, electric cars, people are waiting for these with bated breath


4. Too much oil is being produced, and the huge increase in price was simply put, unjustified. When oil shot up after Hurricane Katrina, it never came back down... never!!! This was because those countries liked the extra income and we were buying it! Now, we are finally limiting ourselves, car makers are putting efficient vehicles out, and thank god, the oil conglomerates will finally have to realize that demand is way down and it will stay there
i don't know how much that is in Euros or whatever, but i know that in the Houston Texas area where i live, about 4 months ago gas was $4.00 and something, and yesterday i saw gas for $1.89. im as curious as you are.
the barrel price got cut in half