The US elections, the looming $600 billion “fiscal cliff,” the superstorm, the growing petroleum inventories, and the Greek austerity vote combined to make a volatile three days for the oil marketsthis week. Prices climbed some $4-5 a barrel on Monday and Tuesday before reversing and dropping $4.25 on Wednesday -- the largest one-day drop of the year. New York oil closed at $84.55 and London at $106.82, down $12- $14 a barrel from the mid-September highs.
With the elections out of the way, attention in the US now turns to negotiations on how to avoid the $600 billion in tax increases and spending cuts that are on the books to begin early next year. With little fundamental change in the power balance in Washington, and both sides feeling vindicated by the election results, it is feared that wrangling will continue until serious damage is done to the US economy through sudden cuts in government spending and increased taxes. These fears sent the equity markets as well as commodities down over 2 percent on Wednesday.
The weekly stocks report confirmed that superstorm Sandy resulted in a 1.7 million barrel increase in crude stocks due to refinery closures and a 2.9 million barrel increase in gasoline inventory due to widespread power outages -- some of which have not yet been repaired. MasterCard reported that US gasoline demand fell 2.4 percent last week. The decline in New England was 3.9 percent and 3.6 percent in New York and New Jersey. However, the report period covered the period just before the storm hit when presumably people were filling their gas tanks.
US crude production climbed to 6.68 million b/d last week which is the highest level since 1994.
The reelection of President Obama is widely believed to lower the chances of military action against Iran; however, the sanctions are continuing to take a toll on Tehran’s economy. A new survey suggests that Iranian crude output may have fallen by 200,000 b/d in October to 2.65 million b/d. This week Iran’s oil minister again suggested that Iran may simply stop exporting some or all of its oil, thereby spiking world prices, in retaliation for the increasingly harsh sanctions. While Tehran seems to have taken blocking the Straits of Hormuz in retaliation off the table, short on an attack on its nuclear facilities, it did set up a new naval base in the straits.
The fighting in Syria is continuing with assassinations, bombings, and rebel advances coming ever closer to the heart of the Assad government. Talk of offering Assad foreign sanctuary in return for stepping down is increasing.
Athens was roiled by a general strike this week in the midst of debate on tough new austerity measures. The austerity bill passed by only the slimmest margin Wednesday night after many members of the governing coalition defected. A final vote on a budget is due to be taken later this week. Should the budget pass and the coalition government still be intact, the EU’s €30 billion bailout could be released next week. If things go badly, then the Eurozone could be in a lot of trouble.