Developments this week
This week oil prices have continued the precipitous drop that began in early May sending prices down some $17 a barrel to close at $89.90 in NY and $105.56 in London. The usual factors – weak demand, increasing stockpiles, a falling Euro, economic and political turmoil in the EU, and some movement in the Iranian nuclear negotiations – all contributed to the decline. Along the way some new records are being set. US crude inventories are now at their highest in 22 years; US gasoline consumption for the week is at a 12-year low; and the Euro at the lowest level since July 2010.
With no end to the decline in sight, analysts are talking about $85 and even $75 oil shortly. It should be noted that the cost of production in many tight oil fields, tar sands projects, and even some deep water wells is very close to the new lower pricing of oil. If prices drop much further, we could start seeing cutbacks in some of the high-cost sources of oil production as we did in 2008.
The full extent of the decline in crude prices has not yet made it to many retail gas pumps. Along the West Coast, gasoline is still going for $4.20-4.30 a gallon and we still have not had word on the possible closure of a major Philadelphia refinery at the end of July. MasterCard reports that US gasoline consumption was up last week to the highest level since December but is still running behind the same week last year. The EIA reported that US gasoline stocks were down by 3.3 million barrels last week suggesting that a lot of gasoline exporting is going on.
There seems to be continuing disagreement at the Iranian nuclear talks in Baghdad which are going over into a second day. Despite some sort of agreement between Tehran and the IAEA concerning inspections, the situation still seems as dangerous as ever. After years claiming they are not building a bomb, the Iranians are obviously not going to let inspectors anywhere near evidence that would invalidate this claim.
With the standoff between the Germans and Greece’s voters going nowhere, it now seems like Athens exit from the zone is only a matter of time. The Germans have ruled out “Euro Bonds” which was the latest scheme to rescue Greece. The issue now is how fast and bad the fallout of Greece’s departure will be. The OECD has slashed its Eurozone growth forecast due to recessions in Italy and Spain, and sees threats to global economic recovery.
US natural gas prices have held steady around $2.72 per million this week. This is getting into the price range last seen in February and with a 70 cent per million increase in the last month many utilities may be considering turning off the gas-fired boilers again. The continuing drop in drilling for gas should be bringing production down soon and forecasts of some warmer-than-usual weather ahead increasing the demand for electricity continue to support prices.