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Why surging crude supplies weigh down oil prices

Ingrid Pan, Sr Energy Analyst

U.S. oil supply is an increasingly important factor in oil prices

Oil prices are fundamentally based on supply and demand dynamics. Higher supply weighs down prices (and vice versa). Over the past several years, U.S. oil production has increased significantly. The recent domestic oil production growth has been offset by other factors such as declining supply from other sources and increasing demand from emerging economies such as China. However, increasing U.S. oil production growth could weigh down prices if it’s not balanced by other factors. Additionally, as U.S. oil production grows and some other countries’ oil production decreases, the United States produces an increasingly larger share of the world’s oil, which results in more impact for U.S. oil production data.

(Read more: Bakken crude begins to trade at premium to WTI, benefiting North Dakota names such as Whiting)

Domestic oil production rose to highest level since December 1990

The U.S. Energy Information Administration (EIA) reported that domestic crude oil production recently rose to 7,555 thousand barrels per day—the highest level since December 1990. As we’ve seen, U.S. crude production has been growing over the past few years. However, this figure may have been higher than the market had anticipated, as it represents 0.9% growth over the prior week’s reported figure of 7,490 thousand barrels per day.

(Read more: Brent crude prices advanced along with WTI crude, but tighter spread)

Oil prices dropped slightly on the day

The reported supply surge along with weaker than expected economic data out of China dragged down oil prices. Crude finished at $105.39 per barrel, down from $107.23 per barrel. Lower oil prices are broadly a negative for oil producers such as Exxon Mobil (XOM), Chevron (CVX), ConocoPhillips (COP), and Hess (HES), as they reduce revenues for the names as well as energy exchange-traded funds such as the Energy Select SPDR ETF (XLE). However, note that increasing supply in itself isn’t necessarily negative, as the growth in domestic production is also a sign of health in the U.S. oil industry because it signals that companies are willing to put the capital into drilling more oil wells.

(Read more: Why ethane stopped trading like crude and started trading like nat gas (part II))

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