Oil prices suffered the largest monthly percentage loss in over a decade, as the WTI (West Texas Intermediate) spiraled from $65.31 to $50.93 in November, losing 22 percentage points.
On the most basic level, the drop resulted from an increased supply and decreased demand.
“Going back to macroeconomics, it’s a supply and demand situation, and right now the world demand isn’t quite what it was last year,” Wyoming Oil and Gas Conservation Commission Supervisor Mark Watson said.
Supply is partially up due to shifting circumstances in international affairs. After the U.S. Government put sanctions on Iran Nov. 5, oil producers in Saudi Arabia were encouraged to increase production. For most countries, these sanctions forced companies to choose between using a U.S. oil supplier or an Iranian one. The Trump administration gave exemptions to companies in eight countries, however, allowing demand for Iranian oil to float at numbers higher than originally expected and causing the extra Saudi oil to lose value.
Although 22 percentage points is a dramatic drop, Watson said that the effects aren’t as noticeable as drops that occur in other financial markets.
“If the stock market went down 30 percent, people would really notice it. Whereas, if oil goes down 30 percent, they don’t notice it as much. Plus they’re paying less money to fill up a tank of gas,” Watson said.
Furthermore, local effects surrounding employment and drilling won’t be felt unless the drop continues for six months to a year.
“Operators don’t make decisions based on the short fluctuations of oil and gas, just because it happens all the time,” Watson said.
If the price drops below a favorable value, the oil rigs will continue operating, but not at full production.
“If the price isn’t right, they’ll just not put it on production,” Watson said. “So it’s kind of like money in the bank. They’ll see if the price goes up before they put it back on production.”
The break-even point, or the cost required to make a product ready for the market, is higher for Wyoming than it is for other parts of the country. This is due to the process involved, as well as transportation issues. Oil from Wyoming is transported to Oklahoma because the refineries in Wyoming are more suited to heavy oil like that drilled in Alberta, Canada. Despite this, the drills in Wyoming will keep operating, even if the price of oil falls below the break-even price.
“Break-even, I’ve read, is in the mid-forties in the Powder River Basin, but obviously no one wants to break even because then you’re not making money,” Watson said. “That’s kind of a floor, to say, ‘we want the price to stay above $45, otherwise we’re losing money.’ If that’s the case, then you’d have a situation where they’d drill it and not produce it until the price came up.”
Despite the 22 percent drop last month, oil prices made gains today, revealing the natural volatility of the market. The gain came about because of another fluctuation in international policy, this time due to a trade truce between the U.S. and China. Prices may dip back into the overall downward trend again, as oil prices have been since October, but only time will tell.