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Oil Prices Drop Below $100 Per Barrel

Oil Prices Drop Below $100 per Barrel

For the first time since July, oil futures are down below $100 per barrel. Crude for November delivery was down $1.59 yesterday, to $99.22. Meanwhile, West Texas Intermediate crude oil for December delivery was down $1.43, to $99.68 per barrel, on the New York Mercantile Exchange (NYMEX).

Partially responsible for falling prices are rising stockpiles in the US — this week, a report from the Energy Information Administrationapointed to a 4-million-barrel addition to domestic supply for the week ended October 11. Other factors contributing to dropping oil prices include seasonal refinery maintenance, "substantive" meetings between Iran and the five powers of the UN over nuclear negotiations and OPEC's statement this weekend that the world is currently adequately supplied when it comes to oil.

Commenting on the impact that falling oil prices will have on investors was Phil Flynn, a senior market analyst at Price Futures Group in Chicago. He told Bloomberg that after having crossed below $100 per barrel of oil, "the fundamentals are heavy and people are starting to try to protect their oil position on the downside."

Good for investors?a

Generally speaking, falling prices are not good for investors. However, Bloomberg's Adam Johnsonamakes a case for the benefits that sub-$100 oil prices can have for refineries — and, by extension, consumers and investors — by arguing that refineries tend to just scrape by when using a NYMEX futures product called the "3-2-1 Crack Spread" to hedge against refining costs.

NYMEX's 3-2-1 Crack Spread runs on the principle that three barrels of crude are equal to two barrels of gasoline and one barrel of heating oil, for instance. Looking at the spread, Johnson highlights that refiners are not profitable until the spread is around $10 per barrel. Lately, refineries have been producing at a proxy of at least $10/bbl, which brings up the argument that lower prices will be better for the refineries that are currently trading at "mid-single digit price-to-earnings ratios."

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