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Why has international oil(USO) prices plummeted?



As OPEC and Russia failed in negotiations and could not reach an agreement to reduce production, Saudi Arabia issued a comprehensive production increase announcement. Russia followed Saudi Arabia to increase production. 

Due to the sharp increase in oil supply, international oil prices plummeted, and US stocks were affected by the spread of the epidemic, and international oil prices The plunge, the U.S. stock market plummeted, triggering multiple fuses.

S&P500 Index
S&P500 Index

Oil is a commodity whose price is affected by supply and demand. When oil production increases, supply increases, prices fall, and at the same time affected by the epidemic, demand decreases, and prices also fall. Oil supply increases and demand decreases, which is the main cause of the plunge in international oil prices.

In terms of oil supply, since the United States developed shale oil, US oil production has become the world's largest. The production cost of shale oil is more than US $ 40, which is the highest cost. The advantage of shale oil is that it is flexible in exploitation. When the price of oil is high, the United States will increase the production of shale oil. 

Excessive international oil prices are not good for Saudi Arabia: Excessive oil prices have led to the development of a large number of shale oil wells, and excessive supply of shale oil will reduce Saudi Arabia's market share. In this situation, Saudi Arabia will lose control of oil prices. As a result, Saudi Arabia's increase in oil production has caused oil prices to fall.

In terms of oil demand, falling oil demand will also cause oil prices to fall. On the one hand, with the popularity of Tesla's electric vehicles, new energy vehicles continue to develop, and the development of more clean energy will reduce the demand for oil as an energy source. 

On the other hand, affected by the global spread of the epidemic, there will be more shutdowns and productions in countries around the world, which will also lead to reduced demand for oil. Although petroleum as an industrial raw material still has many uses, the demand for industrial raw materials cannot keep up with the increase in oil production, which leads to the inability of oil prices to rise.

With the increase in supply and decrease in demand, the international oil price has plummeted. The analysis from the fundamentals is not complicated. The political level is the trigger of this situation.

WTI Crude Oil
WTI Crude Oil

For oil-demanding countries, including China, Japan, South Korea, and other countries, the decline in international oil prices is favorable and can reduce the cost of oil imports by countries. 

For Tesla electric vehicles or the new energy vehicle industry, falling international oil prices may be unfavorable. However, electric vehicles are the future development trend, and international oil prices will not continue to fall, nor will they hinder the development of the electric vehicle industry for a long time.

As an investor, when international oil prices are underestimated and oil prices are cheaper than water, investing in oil-related assets may be a buying opportunity that can add value to the asset portfolio.

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