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Why the Oil Markets Dropped 4.5% in 1 Day

By Motley Fool Staff - Mar 28, 2017 at 12:14PM

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The U.S. makes up just a small part of the market, but a 9-million-barrel inventory build caused the markets to drop a whopping 4.5%.

Recently, the oil markets dropped a whopping 4.5% on the news that the U.S. had an inventory build of 9 million barrels -- despite the fact that the U.S. accounts for only 16% of the market.

In this clip from Industry Focus: Energy, Motley Fool energy analysts Sean O'Reilly and Taylor Muckerman talk about one possible explanation for why the market reacted so strongly to the news, and what an oil build means in the greater context of the sector today.

A full transcript follows the video.

This podcast was recorded on March 23, 2017.

Sean O'Reilly: The other thing was, I think the day I had him on, there was another inventory build. I think it was just under 9 million barrels, it was unexpected, everyone was freaking out, oil fell 4.5% that day. And Crowe and I chatted about it, and his point was, the United States oil market in terms of consumption and, therefore, very closely tied to Cushing --

Taylor Muckerman: West Texas Intermediate pricing at Cushing, yeah.

O'Reilly: It's 16% of the oil market. That's a lot, cool. But this is not the oil market.

Muckerman: Yeah, OPEC still reigns supreme.

O'Reilly: Well, no, his point was, everybody is worried about oversupply here, and it's being stored here, but his point was, the market fixates on U.S. supply and storage here because this is the only good data we have. For example, China's oil production is down 7%. But do we trust that? We definitely don't trust the Saudi Arabian numbers. They're all checking each other, or whatever, I don't know what that means.

Muckerman: Yeah. I don't know if we have any necessary reason -- just because a U.S. government agency isn't able to validate it, doesn't mean that it's not true.

O'Reilly: Right, but it also doesn't mean --

Muckerman: Maybe they're thinking the same thing about our inventory numbers.

O'Reilly: Fine. It just seems odd to drive the price down of a global commodity, that arguably, our economy needs right now, down by 4.5% in a single day because of the inventory numbers in one market that represents 16% of the global market.

Muckerman: Well, I think it's because of the fact that --

O'Reilly: This has a "Mr. Market" Benjamin Graham feel to it, is the point.

Muckerman: I think maybe prices took a nosedive because they weren't all that high to continue to build inventory. That just means that these companies really don't care if oil is in the $40 range, they're going to continue to produce. It also means that demand isn't soaking up the new production. So, you look at, the IEA came out recently and suggested that oil demand growth -- not oil demand overall, but oil demand growth -- will slow in 2017 versus 2016. So, you had around 1.6 million barrels per day of new demand growth last year. They suggest only 1.4 million barrels of new demand growth this year. Meanwhile, the U.S. is likely going to produce 1 million more barrels per day, which is almost the entire new demand growth. And if OPEC wanted to, they could just reverse the cuts that they have, and that would totally absorb and likely oversupply the market. Goldman Sachs suggests that that's going to happen in 2018 or 2019 or 2020, when the historic spending of the early teens catches up to us because of the megaprojects that were spent on 2011, 2013 --

O'Reilly: So, those aren't on line yet, to your knowledge.

Muckerman: They're coming on line. But the bulk of them will be in full force in the next few years. And these are the projects that have a long life span compared to shale oil.

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