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What Explains The Sudden Drop In Oil Prices

Oil prices dropped on Thursday morning, extending losses from Wednesday’s close to the lowest levels in more than a month, after U.S. data showed gasoline demand is faltering despite major inventory draws in recent weeks.  

As of 12:13 p.m. on Thursday, WTI Crude was trading down 1.04 percent at $41.11 and Brent Crude was down 1.33 percent on the day at $43.87. Both benchmarks hit earlier in the day their lowest level since the end of July, after the market found the latest U.S. implied gasoline figures as bearish.  

On Wednesday, the Energy Information Administration (EIA) reported a crude oil inventory draw of 9.4 million barrels for the week to August 28, driven by Hurricane Laura. However, the EIA report also showed that gasoline demand for the week ending August 28 was 8.786 million bpd, down from 9.161 million bpd for the prior week to August 21. Gasoline demand had materially improved from the April lows until June, but after that it has been stuck at below 9 million bpd between end-June and end-August, with the week to August 21 the only exception of demand above 9 million bpd.

Oil prices plunged later on Wednesday because of lower refinery runs and the upcoming refinery maintenance season which is expected to dent demand for crude oil.

A sudden U.S. dollar strength on Wednesday also pushed oil prices lower, John Hardy, Head of FX Strategy at Saxo Bank, said on Thursday.

Commenting on Wednesday’s oil price performance, Hardy said, “No major technical levels got broken but a break below the 50-day moving average on WTI at $41.25/b and Brent at $44/b may signal a deeper and, in our opinion, much needed correction following months of inactivity.”

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Meanwhile, the equity markets are taking a hit early on Thursday, with the NASDAQ falling 5 percent for the biggest decline since March, with tech stocks plunging after being overbought in recent months.

On the other hand, many major oil stocks – including Exxon, Chevron, Occidental, ConocoPhillips, Shell, and BP – on the NYSE were up on Thursday morning, as the energy sector was performing well while the tech stocks on the NASDAQ Amazon, Apple, Microsoft, Facebook, and Tesla were down.

By Tsvetana Paraskova for Oilprice.com

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