Oil market volatility continues with prices climbing $1.75 on Tuesday on news of problems with the US’s Colonial pipeline, a strike in Brazil, and a work stoppage in Libya. On Wednesday prices fell again after the EIA reported the 6thconsecutive gain in US crude stocks, and a jump in US production of 48,000 b/d last week. The EIA, however, has admitted that its weekly production estimates have a margin of error of 100,000 b/d until solid data comes in. Traders seem impressed by how much oil US drillers continue to produce despite the massive reduction in rigs and capital spending in the past year. The EIA currently puts US production at 9.2 million b/d – down by only 400,000 b/d since the June high. New deepwater wells that were started several years ago and cost too much to postpone production continue to come online – partially offsetting the decline in shale oil production.
A leaked OPEC document contributed to the decline this week by projecting that demand for OPEC’s oil will be weaker for the next few years. At the close Wednesday London oil was at $48.58 a barrel and New York at $46.32 – about in the middle of the trading range for oil futures during the past two months.
On Wednesday the US dollar rose to a three-month high after the Federal Reserve Chair Yellen indicated the board might raise interest rates next month. Such a move would strengthen the dollar and lower oil prices. The market consensus still sees an oversupply of crude, weaker demand, lower prices somewhere ahead. A “lower-for-longer” oil price outlook seems to be the watchword of the day.
The Keystone pipeline was back in the news this week after TransCanada asked the State Department to delay action on the request to build the pipeline for a year or so. The move was widely interpreted as an effort to postpone the decision until after the Presidential election in hopes that a Republican President would approve the project. The White House immediately issued a statement saying the current administration would make the decision, widely believed to be unfavorable, during its term in office.
US factory orders fell for the second straight month in October as freight carried by major US railroads fell by 7 percent in the second quarter as compared to 2014. Much of this drop in freight movements is due to the smaller quantities of oil and coal being moved by rail. Some US East Coast refineries are shifting back to foreign oil again as tanker-delivered oil is in some cases cheaper than that coming by rail from North Dakota.
There is an undercurrent of concern about the immediate future of the US and Chinese economies, despite optimistic assertions from Washington, Wall Street, and Beijing. China’s official purchasing manager index continued to show a contraction in October. President Xi announced that 6.5 percent annual GDP growth will be a new floor for China’s economy. This suggests that no matter what happens to China’s GDP in coming years, nothing below 6.5 percent will be announced as the official rate of growth.
The head of the Russian Central Bank said this week that the slump in oil prices may last for a long time. Moscow is having a bad week over the crash of a Russian tourist plane in the Sinai. Either the Russian government in guilty of allowing planes to fly with poor maintenance or ISIL has found a way to retaliate for Moscow’s bombing of ISIL forces in Syria. Either way, this story has a long way to play out.
