1. Oil and the Global Economy
Oil prices continued to fall last week with NY futures touching a low of $83.59 a barrel on Friday, the lowest since July 2012, before rebounding to close the week at $85.82. London oil did little better, touching $88.10, the lowest since 2010, closing at $90.21 – down 2.3 percent for the week. Prices are now down over 20 percent or over $20 a barrel since mid-June. The price decline was furthered along last week by OPEC’s monthly report which said the cartel’s production rose by 400,000 b/d in September; the US’s weekly stocks report which showed US crude inventories increasing by 5 million barrels; a cut in official Iranian selling prices to compete with those of the Saudis; and an increase in Russian oil production to 10.61 million b/d last month.
Although many oil traders believe that prices are nearing a floor of around $85 per barrel, speculative bets that prices will be as low as $77 a barrel by December increase. The IMF continues to forecast that the global economy will contract next year especially in Asia and the EU. Russia’s economy is contracting due to the Ukrainian sanctions. Moreover, adding to declining demand is the reduction in state subsidies in several Asian nations thereby reducing demand. Only the US economy which is benefiting from increasing quantities of cheap domestic natural gas and falling oil imports seems to be doing a bit better.
The reaction to the steep price drop over the last four months is beginning to appear. Except for a few of the gulf Arab states, most of the major oil exporters are hurting from the price decline as they can no longer meet their national budgets which are mostly financed by oil exports. Splits in OPEC are starting to occur with Venezuela, which is in a lot of fiscal trouble, calling for a special OPEC meeting to cut Gulf Arab oil production (not Venezuelan of course). Tehran has warned the Saudis about what happened in 1998 when over-production sent oil prices down to $10 a barrel. The situation was not helped by the Saudi announcement last week that they had increased production by 105,000 b/d in September and the Iranian oil price cut last week which is beginning to look like a price war. Conspiracy theorists are already saying that there is a secret deal between Washington and Riyadh to keep prices low to punish Moscow for the Ukrainian situation.
The second major problem of rapidly falling oil prices is the effect it will have on US shale oil production, much of which is on the margin of profitability at today’s prices. Analysts say the cost of producing a barrel of US shale oil varies from $50 to $100 depending on the location of the well. Some are saying that 70 percent of US shale oil production would still make money if selling prices fell as low as $75 a barrel. The Deutsche Bank, however, says that 9 percent of US shale oil production would be uneconomic at prices below $90 a barrel and 40 percent would be uneconomic below $80. In mid-September, Bakken crude was selling for $74 a barrel at the well-head, down $15 a barrel since June. US crude prices have fallen another $10 a barrel in the last month and drillers in North Dakota are facing mandates to reduce flaring of natural gas associated with oil production and ship their oil in a safer manner thereby further increasing costs of production.
The EIA projects that US domestic oil production, mostly shale oil, will increase by 1.1 million b/d this year and 900,000 b/d next year. If oil prices continue to fall much more, some of the plans to continue the unprecedented pace of drilling will likely be curtailed and production could even start to slip due to rapid depletion of existing wells.
Traders of natural gas futures are torn between the increasing production and mild temperatures which are combining to refill storage caverns at an unprecedented pace; and forecasts that we might see a return of the polar vortex this winter. If that should occur we could once again see unprecedented withdrawals and the danger of shortages. These two competing concerns have had natural gas futures on a roller coaster since July with prices fluctuating between $3.80 and $4.25 per million BTUs. Natural gas futures are currently trading near their lows, closing at $3.86 on Friday while awaiting the next round of winter weather predictions.
2. The Middle East & North Africa
resilience
