Peak Oil Notes – Aug 20

On Wednesday, oil futures suffered their biggest one-day fall in a month after the EIA stocks report showed a 2.6  million barrel increase in US crude inventories after analysts had forecast a 600,000 barrel decline.  At the close New York futures were at $40.80 a barrel and London’s Brent was at $47.16. The stocks report also showed an estimated 0.5 percent drop in US crude production, but this was overwhelmed by a 6.1 percent increase in US imports. The ability to store excess crude is once again becoming an issue with some saying that US imports are strong as the US has much of the world’s remaining crude storage space.
 
As has been the case for many weeks, worldwide overproduction of oil and fears that China’s economy is in a lot of trouble has spurred the decline in prices. In the US, the end of the summer driving season; an outage at a major refinery; and the prospects of refinery demand falling by 500,000-600,000 b/d during September and October when seven or eight Midwestern refineries are scheduled to close for maintenance, has analysts forecasting further price declines.  Stocks at Cushing, Okla. took a 326,000-barrel jump last week, likely due to the BP refinery outage in Indiana.  Forecasts of $30 oil are appearing daily.
 
The markets are heading into largely unknown territory with the outlook for low prices possibly lasting for another year or more. There are many moving parts to the oil story and as usual, the future is hard to see clearly. Some refiners could delay maintenance to take advantage of very low oil prices and some producers could cut oil output rather than sell oil at prevailing prices.
 
The impact of a prolonged spell of low oil prices is going to be felt in different ways in different countries. Oil importers should receive an economic boost, while the major exporters that are dependent on their oil and gas revenues are heading for still more trouble and possibly even domestic unrest.  Russia’s ruble has lost 13 percent of its value against the dollar in the last month with the currency again approaching the 70 rubles to the dollar valuation it briefly touched last winter. Russia’s foreign currency reserves have fallen to $360 billion from $540 billion two years ago and senior officials say the government no longer has the means to support its currency. Moreover, Russia’s economy is undergoing rampant price inflation and contraction due to low oil prices and the Western sanctions. The government’s destruction of hundreds, if not thousands, of tons of Western food that has been brought into the country surreptitiously is creating still more inflation of food prices.
 
China’s stock markets took a 6 percent hit on Tuesday, but recovered a bit on Wednesday after another round of heavy government intervention. China watchers are becoming increasingly concerned about the erratic decisions emanating from Beijing in its efforts to revive its economy. So far, nothing seems to have worked and the outlook is for continued contraction of the country’s GDP.
 
Concerns also are rising that we are facing a global deflationary crisis similar to that experienced in the 1930s.  We now have oil and other commodity prices at new lows, and falling. There is no question that the Chinese and Russian economies are contracting. Interest rates are nearly at zero leaving little room to address deflation through interest rate adjustments. The financial press is arguing that a US interest rate hike next fall would only make matters worse.
 
There has not been much movement in the Middle Eastern situation this week. Another key Democrat says he will not support the nuclear agreement, but the assessment that the administration still has the votes to sustain a veto remains intact. The Iraqi government is busy reorganizing itself amidst very high summer temperatures which have dampened efforts for any offensive against ISIL. In Yemen, the anti-Houthi forces are making progress in driving the Shiites back to the north.