1. Oil and the Global Economy
Oil prices continued to fall through Thursday when New York futures traded below $80 a barrel and London as low as $82.60. Prices then rebounded to close Friday at $82.75 in NY and $86.15 in London. As has been the case for several weeks, the 25 percent price drop from the year’s highs was based on the perception that there is a glut of oil on the world market; the Saudis and other Gulf Arab states refusal to cut back production immediately; and fear. There are mixed opinions as to whether we have seen the bottom of the price plunge. Better economic data appeared on Friday and Goldman Sachs issued a report challenging the notion that the world markets are over supplied. They believe prices have overshot on the downside. Others, however, note that the pause in the price decline may only be profit-taking and that there is unlikely to be any change in OPEC policies until at least the end of November. Taking advantage of the relatively low prices, China seems to be stepping up its imports, likely to bolster its strategic reserves.
Beyond the issues of where the bottom to the bear market might be and how long it will be before prices rebound, the other major question arising from the price drop is whether OPEC will reverse its current policy and cut production enough to drive prices higher. There has been much discussion of a conspiracy between the Gulf Arabs and the West to drive prices lower in order to bolster western economies and hurt those of Russia and Iran. Some are even suggesting that the Arabs have opened a price war with US shale oil. By keeping prices low, high-priced oil from North Dakota and Texas will no longer be economical.
Thus, another much-discussed issue is the price level that will cause drillers to begin cutting back on new drilling for shale oil. North Dakota’s Bakken oil is not only expensive to produce, it is expensive to get to market and has been selling at a discount of $15+ a barrel to West Texas Intermediate. This means that with West Texas oil at $82 a barrel, Bakken oil is going for circa $65. This discount is not a problem in Texas where most oilfields are connected to pipeline systems that can quickly and cheaply move the oil to market.
Ever-optimistic Wall Street banks are saying that the price drop is nearly over and that NY oil will stay above $80 a barrel. The NY Times ran a story last week concluding that shale oil production would only slow modestly if prices fall another $15 or $20 to $60 a barrel. The paper does not get into the issue that North Dakota oil is now selling for $66. The Times also noted that the EIA concluded this week that only 4 percent of US shale oil production needs prices above $80 a barrel to break even due to recent advances in drilling efficiency.
There is little doubt that the current pace of US oil production would be difficult to slow. Contracts and equipment are in place and any cutbacks in drilling would likely be in the least productive areas. US consumers are obviously benefitting from lower fuel prices with average US gasoline prices now approaching $3.10 a gallon. Citigroup says that the global economy has received a $1.1 trillion stimulus for lower oil prices as more money is now staying with oil importers rather than going to exporters. This stimulus is already showing up in the US with oil imports down 7 percent from last year and many economic indicators looking better.
US natural gas prices fell to their lowest of the year last week as mild weather kept heating and cooling demand to a minimum and record supplies are building up inventories for winter. Prices have fallen 6.8 percent in the last two weeks and are now below $3.80 per million BTUs. The low prices seem to be having little effect on drilling, however, despite much production taking place at a loss. Weather forecasters say the weather will get much colder in the northern US until the end of the month.
2. The Middle East & North Africa
resilience
