Why Crude Oil Prices Fall: 2 Factors To Consider

Last week we looked at the role of the JPY and the CHF as safe-haven currencies. Today, we shall look at the reasons why crude oil prices fall in a risk off-market.

27 January, 2020 | HYCM – The price of crude oil declined close to a three-month low on Friday. It slumped a further 2% to multi-month lows on Monday.  Below, are two factors that have dragged the price of the black gold down.

1# Crude oil prices drop on coronavirus fears

Last week we saw the move to a risk-off market on the fears that the Chinese coronavirus would become a global pandemic. These fears have continued this week. One of the casualties of these fears is the commodity oil. It fell sharply last week. Why? Well, when the market is in a risk-off mood it is fearing that the global economy is going to shrink. See US Oil Chart for a recent fall in oil prices.

Crude oil prices fall

Less growth means less machinery movement for transportation and construction. This, in turn, means there is less demand for oil, so oil prices fall. In the coronavirus instance, people will also travel less by airlines. Remember, in the current market conditions oil is heavily oversupplied, so there is already an oversupply which is keeping oil prices pressured. So we can expect sellers on oil retracements during the coronavirus crisis.

2# Middle east conflict

Does oil ever rise in a risk-off market? Yes, when the risk is impacting oil’s supply levels. So, during the US-Iran crisis at the start of this year, the market was concerned that a wider middle east conflict would impact some of the world’s largest oil producers. Saudi Arabia, Kuwait, Bahrain, Iran, and Iraq. In this case, although the markets went into a risk-off mood, oil prices increased. Why? Simply because in this instance a middle east conflict would have reduced the supply of oil and pushed it up. See the chart below:

oil prices fall

However, this is the exception to the general rule that oil markets fall in a risk off-market.


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