Crude Oil Prices Hit New Low This Week – What it Means for Procurement

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Crude oil prices have been plummeting for months, and on Monday, they hit a low not seen since March 2009. The benchmark U.S. oil price fell to a 6-year low of $42.85 a barrel yesterday. A rising US oil supply is helping to drag down oil prices, as is the prospect Iran crude oil may be available on the market as negotiations over the country’s nuclear program are becoming more promising.

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Oil stockpiles in Cushing, Oklahoma, a major US hub, grew to 1.7 million barrels between March 6 and 13, a new reported noted. The stockpiles are double of what some estimated they would be by now. Add the prospect of Iranian crude oil to the mix, and you have and even more heavily saturated market, The Wall Street Journal noted.

Prices Could Impact Procurement

Oil prices could be good news for procurement, as it may lead to lower manufacturing costs. As my colleagues Jason Busch and Lisa Reisman predicted late last year, when oil prices continue their dive, companies are likely to see lower logistics and manufacturing costs through the beginning of 2015. However, procurement organizations need to keep in mind they still should be holding suppliers accountable for price de-escalation clauses in longer-term agreements.

The oil price decline is good news for the manufacturing industry itself, too. Other industries like transportation and airlines will also benefit. Another effect of falling oil prices is lower gasoline, which can lead to a higher demand for automobiles. When gasoline prices fall, auto manufacturers see an overall increase in demand. Recent data, too, shows demand for larger vehicles with less gas mileage (like pickup trucks) has already grown.

Will Supply Surplus Last?

While the US is seeing a surplus in oil supplies currently, it may not last for long. The US Energy Information Administration is already predicting a drop in production from 2 of the country’s major producing oil regions: the Bakken (North Dakota) and Eagle Ford (Texas).

The Financial Times also predicted that if crude prices remain around $45 a barrel, US oil production will likely begin decreasing later in the year.

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