Why the Price of Crude Oil Dropped in 2015

The oil industry is full of economic booms and busts. In October 2015, the industry was in a downturn, and the price of crude oil dropped significantly. Earnings were down for companies that made high profits in the previous fice years, and those companies responded by decommissioning half their overall rigs and cutting investments in exploration and production.

The cause of the downturn was the declining price of a barrel of oil. Prices were cut in half in less than a year, reaching lows that people had not seen since the last global recession. Prices recovered periodically in 2015, but many oil executives believed it would be years before oil returned to $100 per barrel. As of October 2018, it looked like they were right, and the circumstances surrounding oils drop continue to plague the commodity. 

The strong U.S. dollar was the main driver for the price decline of crude oil. In fact, the dollar was at a 12-year high against the euro, leading to appreciation in the U.S. dollar index and a reduction in oil prices. That put the market under a lot of pressure, because when the value of the dollar is strong, the value of commodities falls. Global commodity prices are usually in dollars and fall when the U.S. dollar is strong. For example, the surge in the dollar in the second half of 2014 caused a sharp fall in the leading commodity indexes.

Another leading factor in the sharp price drop of crude oil is that OPEC, a cartel of oil producers, was unwilling to stabilize or otherwise "prop up" the oil markets. Prices of OPEC’s benchmark crude oil had fallen 50% since the organization decided against cutting production at a 2014 meeting in Vienna.

Of the participating countries in OPEC, Iran, Venezuela and Algeria wanted to cut production to firm up prices. Saudi Arabia, the United Arab Emirates and other Gulf allies refused to do so. Iraq sits alone as the only OPEC country that not only maintained supply but actually increased it. This resulted in an oversupply of oil, which in turn placed downward pressure on crude oil prices for the long term.

Crude futures declined in late September 2015 given that the global oversupply was increasing their oil stockpiles. Total oil production by year-end 2015 was expected to rise to over 9.35 million barrels per day, higher than the 9.3 million barrels per day forecasted in February 2015. That showed that the market was not only oversupplied, but that future supply would actually increase.

In relation to futures, oil inventories rose ven more than expected. The Energy Information Administration (EIA) reported on Sept. 30, 2015, that U.S. commercial crude oil inventories rose by 4.5 million barrels from the previous week. At almost 500 million barrels, U.S. crude oil inventories were at their highest level in at least the last 80 years, causing a decline in prices.

While supply increased, demand for crude oil was decreasing. The economies of Europe and developing countries were weakening, and at the same time, vehicles were becoming more efficient, which caused the demand for fuel to lag. China's devaluation of its currency suggested its economy may be worse off than expected. With China being the world's largest oil importer, that was a huge hit to global demand and caused traders to dump oil shares. 

The Iran nuclear deal was a preliminary framework agreement reached between Iran and a group of world powers. The framework sought to redesign, convert and reduce Iran's nuclear facilities. The U.S. nuclear deal with Iran allowed more Iranian oil exports. The deal removed Western sanctions against Iran, and investors feared it would add to the world's oversupply of oil. Markets had already reacted to that news by shedding oil, dragging it even further down.