1. Oil and the Global Economy
Oil prices, which have been falling since mid-June, dropped still further last week leaving New York futures at $97.88 and London at $104.84. During the six-week price slump, NY futures fell 6.8 percent and London fell 5.6 percent. Traders continue to ignore the ever-growing chaos in the Middle East and the sanctions being imposed on Russia’s oil industry on the grounds that as yet there has been no significant reduction in global oil supplies. Instead, the markets are reacting to fundamentals such as falling demand for gasoline, inventories, and prospects for economic growth. The “risk premium” has been wrung out of the oil markets in the last few weeks – perhaps prematurely.
The high level of refinery utilization we have seen this summer has resulted in an increase in gasoline inventories as demand for gasoline in the US has been weak even at the height of the summer driving season. Refinery operations will be slowing soon as we enter the fall maintenance season and the switchover to winter fuel production. New pipelines are expected to open in the next two months that will bring an increased flow of Canadian oil through to the US Gulf coast.
The US remains the critical source of new oil production that is keeping world output stable and a lid on prices. Although it will likely be another few years before US production starts to fall, there are already signs that this could happen sooner than most believe. Growth in North Dakota shale oil production is mostly taking place in one county now, discrepancies are developing in just how much oil and condensates are being produced in Texas, and a new federal report shows that the production of oil from the Gulf of Mexico is down by 140 million barrels per year since 2010. The EIA says that US production slipped by 122,000 b/d the week before last. For now this is probably an aberration, but someday in the next four or five years, production is likely to start falling.
resilience
