Peak Oil Review – July 9

A perfect storm formed over the oil markets this week leading to price declines. The Greek debt crisis is still threatening to force Athens out of the Eurozone; until Thursday China’s equity markets were collapsing despite the government’s best efforts to prop them up; many are optimistic that there will be a nuclear agreement with Iran in the near future that will dump additional oil on the markets; the EIA says US oil production still is relatively steady despite the large drop in the drilling rig count; OPEC’s production is still rising; and US petroleum stocks, particularly gasoline, climbed for the second week in  a row. Taken together, these factors pushed New York futures down by some $10 a barrel in the last two weeks to close Wednesday at $51.65 after having been as low as $50.58 on Tuesday. London’s Brent closed at $57.05 on Wednesday, but came very close to $55 on Tuesday. In early Thursday trading however, prices seem to be stabilizing.
 
None of the issues pressuring oil prices seem likely to come to an end in the near future. If anything, Greece’s departure from the Eurozone, further troubles in the Chinese equity markets, or the announcement of a nuclear treaty are likely to push prices lower.
 
The build in US petroleum and products stocks of 10.6 million barrels at a time of year when the surge in summer driving usually pulls them down came as a surprise to the markets. Analysts and the API had predicted a drawdown in crude stocks while they actually grew by 400,000 barrels despite a 200,000 b/d decline in imports last week.  However, it was the 1.2 million barrel increase in gasoline stocks that drove the market lower on Wednesday.  In its Short Term Energy Outlook, the EIA says that US crude production likely fell by 50,000 b/d between April and May, and will continue to fall until early 2016 when it is supposed to begin growing again.
 
While the debt crisis is bringing many hardships to the Greek people, including a possible collapse of its banking system, so far there does not seem to be much contagion to the other weaker Eurozone economies.  Greece’s banks are to remain closed until the end of week when a new bailout proposal is to be presented to Brussels.  Conventional wisdom is saying that Greece’s exit from the Eurozone is near.
 
The Chinese equity market situation, however, is more serious and problems are already surfacing around Asia and other parts of the world as commodity prices are falling steadily. The drop in the value of its equities is already $3.5 trillion and the damage to the Chinese government’s credibility as a master manipulator of economic policy is growing worse every day. In early Thursday trading, however, the government seems to have halted the price plunge by suspending trading of many stocks and forbidding the sale of large blocks of stock. The long-term effects of such drastic government intervention remain to be seen.  At a minimum, economic reforms designed to revive China’s sagging growth rates seem to be on hold. All this is unlikely to be good for China’s demand for oil.