January 5th, 2015

The DJIA took a hit today; dropping 331.34 points (-1.86%) ending at 17,501.65. The S&P 500 declined 37.62 points (-1.83%) ending at 2,020.58. The FTSE declined 130.64 points (-2.00%) ending at 6,417.16. Crude also declined $2.70 (-5.12%) and dipped around $49.99/barrel. Currently it's still hovering around the $50/barrel range.

First, crude oil is a dirty a business so why exactly is West Texas Intermediate crude dropping so much? Excess supply. We have huge growth in oil production coming from the United States right now as fracking continues to see expansion mostly in places like North Dakota, Texas, Colorado, and other states. The fracking business can be brutal and is highly competitive especially in places like the Bakken and Eagle Ford; already companies like Baker Hughes are downsizing both in terms of their employees and the number of rigs in operation.

 The low price of oil caused by excess supply is negatively affecting oil producers around the world, including here in the U.S.

Also, OPEC. OPEC has continued to push out a steady supply of oil in the face of the current supply gut in hopes that they might drive many of the smaller producers out of the business. This is pretty much an act of desperation on their part as the increase in U.S. production has negatively affected them, so we might call this a "tit for tat" move on their part. Other may just call it a price war.

Another reason? Slowing demand-- mostly stemming from China. The International Energy Agency cut its forecast by 230,000 barrels a day to 900,000 and OPEC revised their forecasts of demand for their oil from 29.4 million to 28.9 million barrels a day.
Demand for oil has been increasing steadily over the long-term.

And then there is the dollar. The dollar has been strong lately. Here is what MW has to say on it:
""Commodity prices are inversely correlated to the dollar. The oft-cited rationale is that a stronger currency makes dollar-priced commodities more expensive to buyers using other currencies.

The ICE dollar index DXY, +0.00% a measure of the currency against a basket of six major rivals, is up more than 12% since the beginning of the year and by around 1.9% since the beginning of December.

Binky Chadha, chief global strategist at Deutsche Bank, argues that the strong dollar is the primary factor in oil’s decline. After all, oil supplies have been building for a long time. It’s hard to believe that investors just “suddenly woke up” to the oil glut at midyear, he said.

Oil’s plunge started not long after the dollar rally began to accelerate, Chada notes, observing that it usually takes a rallying dollar a year and a half to cover the ground it’s gained in the last five months, Chadha told reporters earlier this month, which might make finding a bottom in oil “a function of where the dollar stalls.”