Fear Itself Plays Big Part in Crude Oil Price Drop

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Researched by Industrial Info Resources (Sugar Land, Texas)--On November 27, OPEC announced it would maintain its output target in the face of rising global crude oil supply. This action prompted a sell-off of oil futures, causing a massive drop in the price of crude oil in a very short time. The sudden drop of oil prices has worried many in the industry; been blamed for the cancellation, delay or reconsideration of projects; downsized and restructured energy companies; and has been lauded for lowering the price at the gas pump. The price plunge has continued, falling to below $60 per barrel on both West Texas Intermediate (WTI) and Brent crude benchmarks. However, the situation on the ground has remained unchanged. This fear in the abstract financial sphere has created a self-fulfilling prophecy of falling oil prices.

When something scares the investor into thinking their currently-held investment may become worth less than the buying price, the investor usually sells. As more investors follow, a sell-off occurs and the price continues to drop, prompting even more investors to sell. This chain reaction helped lead to the Great Depression. Despite education in the field of finance and investment, not to mention history, investment professionals continue to follow this pattern. That said, not following the pattern poses a high risk for investors who do not sell.

In the beginning of the sell-off, Oil Industry professionals were nonplussed. Oil being sold for $120 per barrel was a situation that most were unaccustomed to, and one that older professionals knew would not last. Some professionals expressed relief as oil fell back into the range of high $70s and $80s per barrel, as this is a more typical price point, and one they were more comfortable with. Indeed, until the price fell below $70, the midstream industry seemed unfazed and willing to continue with its plans. As the sell-off continued, the price of oil began to enter into discussions about the future of projects, fulfilling the doom foretold in the minds of the finance world and affecting future development. Thus, it may not have been the act of maintaining production values by OPEC that caused the price of oil to plummet, but rather the short-term fears and market rules of the commodity trading financial world.

Industrial Info Resources (IIR), with global headquarters in Sugar Land, Texas, three offices in North America and 10 international offices, is the leading provider of global market intelligence specializing in the industrial process, heavy manufacturing and energy markets. Industrial Info's quality-assurance philosophy, the Living Forward Reporting Principle™, provides up-to-the-minute intelligence on what's happening now, while constantly keeping track of future opportunities.