1. Oil and the Global Economy
Oil prices were little changed last week but settled a lower on Friday, down about 25 percent from mid-June highs, to set records for a fourth consecutive month of losses, and the largest monthly decline since May of 2012. London’s Brent crude closed Friday at $85.69 – down 0.4 percent for the day, 0.3 percent for the week and 9.3 percent for the month. New York futures closed at $80.54 after dipping below $80 -- down 0.7 percent for the day, 0.6 percent for the week and 12 percent for the month. $80 a barrel is considered a major barrier, and should oil close below this number, many believe that breaching this barrier will contribute to further weakness.
While the usual factors of too much supply and weak demand were held to be largely responsible for falling prices, the stronger dollar which usually moves inversely to oil price also contributed to weaker oil.
US crude production is estimated by the EIA to have hit 8.97 million b/d the week before last which is the highest since 1986. US crude inventories have increased by 23 million barrels in the last four weeks, but the inventory is expected to begin shrinking as more refineries come out of maintenance and ramp up winter heating oil production.
So far the two major reactions to the precipitous decline in oil prices have been the price war which seems to have broken out within OPEC as some members move to retain their market share, and the issue of whether some of the higher-cost US shale oil production remains an economic proposition. A new survey shows that OPEC’s production increased by 53,000 b/d in October at the time when it should be declining to counter falling prices. Some members are unhappy, but the indications suggest that there will be no major changes at the 27 November OPEC meeting.
The issue of whether the drop in oil prices will curtail US shale oil production is beginning to attract more attention. Initially shale oil production operators were running around denying that there was a problem and that prices could drop another 20 percent and and shale oil would still be profitable. The people who are saying this are already running at a cash flow deficit and need constant infusions of new Wall Street capital to keep drilling. Other larger oil companies which are now exclusively in the shale oil business, however, are beginning to suggest that some planned production may be curtailed next year. Transportation difficulties and the requirement to reduce natural gas flaring are adding significantly to production costs on Bakken shale oil so that we may see some production curtailment in the coming year if oil prices remain lower than they have been in recent years for an extended period.
US average gasoline prices are now below $3 a gallon, the lowest in nearly four years. US consumers should be saving about $250 million a day in lower gasoline prices as compared to early last summer.
US natural gas prices climbed steadily last week as winter weather began to slide down into the US. Snow in parts of South Carolina over the weekend was the earliest ever recorded. Some forecasters are seeing hints that the polar vortex could return this winter. New York natural gas futures began the week at circa $3.65 per million BTUs, and finished at $3.87 after having traded as high as $3.95.
2. The Middle East & North Africa
resilience
