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Oil Plunges Below $39, With No Bottom in Sight

After a price recovery that took crude oil prices to over $60 in June from $46 at the start of the year, the price has collapsed again. However, this sell-off has dropped crude to under $39, a multiyear low.

Among the primary reasons for the sell-off are worry about a sharp slowing of the economy in China. It is usually considered the world’s primary consumer of crude. Additionally, many European nations have not made much of a recovery from the recession. Saudi Arabia has not abated its production as oil prices have fallen. U.S. crude inventories have risen as well, which was not widely expected.

Even if many of the largest U.S.-based oil companies, like Exxon Mobil Corp. (NYSE: XOM), have slowed their operations due to lower margins, the industry has posted layoffs and fracking profits have been undermined by the price drop, oil continues to move into the market from sources outside the United States and Saudi Arabia. This is particularly true of South American nations, like Venezuela, which need the income, and Canada, which relies on oil sales for much of its gross domestic product (GDP).

There is a strong theory that lower oil prices help the United States by cutting prices of gasoline, home heating and petrochemicals. Europe is also highly dependent on oil prices for its recovery, since it has little production of its own.

However, the trouble with China’s economy may trump this. As the second largest nation by GDP, its burgeoning consumer markets are important to developed nations that export to China. The same is true of business-to-business companies that sell China infrastructure and construction components.

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So, the arguments about oil prices swing largely on production by developing nations against China demand.

Many experts do not believe that China is growing at the 7% its government claims. Purchasing managers and manufacturing data seem to confirm this. If China’s growth is well below 7%, it will have entered into a sort of recession, at least by its growth standards. And as Venezuela and Saudi Arabia continue to pump, the tip toward lower oil prices will continue.

By Douglas A. McIntyre