Oil prices continued to fall last week with New York futures settling at $93.65 a barrel, the lowest since mid-January. Brent settled at $102.29, the lowest in 14 months. Despite what appear to be ever-increasing geopolitical risks that oil flows may be interrupted by events in the Middle East or the eastern Ukraine, the markets continue to ignore these developments and focus on weaker demand for oil and adequate supplies. US shale oil production continues to grow with North Dakota reporting that Bakken production was up by 53,000 b/d in June and is now over 1 million b/d. Some of this increase, however, is simply catching up with wells that could not be completed last winter due to bad weather.
Refining along the US’s Gulf Coast hit a record 8.75 million b/d the week before last, pushing up refinery utilization in the region to a record 96.9 percent of capacity. This record, however, may be due to a redefinition of operable capacity. US demand for distillate was over 4 million b/d for the third straight week; however much of this increase may be going to exports which the EIA now puts at 1.2 million b/d.
Last week’s count of drilling rigs showed a drop of 25 rigs drilling for oil, the largest drop since 2012. Some attribute the lower count to drillers moving more rigs to new locations, but others are suspicious that the drop in oil prices over the last seven months is forcing marginal drillers to slow down a bit while awaiting higher oil prices.
One answer to why oil prices have stagnated in the face of so much political unrest is that many large oil traders, particularly the investment banks, have pulled out of the market in recent years, markedly reducing the speculative dollars chasing oil prices. While this has kept prices relatively stable in the last two years, pressures will build as less investment by major oil companies is taking place, and production slows in Middle Eastern countries. This will eventually lead to shortages which will someday result in a spike in oil prices as was seen in 2008. On the top of lower drilling expenditures by major oil companies and turmoil in the Middle East, we have the likelihood that the rapid growth in US shale oil production will come to an end before the decade is out, triggering higher prices if falling exports or reduced offshore drilling does not cause it first.
resilience
