Mid-Week Update

Energy prices continued to fall this week with New York futures trading below $87 a barrel on Wednesday and London oil falling to a close of $91.37. Gasoline futures fell too and natural gas is now trading around $3.85 per million BTUs, down from nearly $4.20 early last week. Wednesday’s drop was precipitated by a 5 million barrel increase in US crudes stocks while analysts were looking for 1.9 million. New York and London prices are now down about 21 percent from recent highs. This decline is raising concerns that expensive-to-produce US shale oil production may not be profitable in some locations. Conventional wisdom is saying that below $80 a barrel cutbacks in drilling new shale oil wells will start to occur; however, many traders, perhaps optimistically, are expecting oil prices to bottom out around $85 a barrel. US production climbed to 8.8 million b/d last week, the highest since 1986.

Inventories of petroleum products also took unexpected jumps last week, with gasoline stocks increasing by 1.2 million barrels vs. an anticipated decline of 900,000 barrels and with distillate stocks increasing by 400,000 barrels vs. an expected decrease of 1.2 million. Although the data will not be available for several months, it seems likely that US product exports which have been unusually strong in the last year or so may be stagnating.

There has been much discussion as to whether the Saudis and their Gulf allies will make substantial production cuts in coming months in boost oil prices. Most other oil exporters are too strapped for cash to cut production. In this week’s story the Saudis are supposed to be cutting prices so that Asian refiners who can no longer process Saudi oil profitably will continue to buy from Aramco.

US natural gas inventories continue to gain due to increases in production and a mild summer. If there is another major increase this week, US natural gas stockpiles will only be about 10 percent below last year going into the winter heating season which should be manageable unless there is record-setting cold in the next six months.

If anything, the situation in the various world trouble spots grew worse this week. In Ukraine, the ceasefire agreement ends this week with fighting continuing as the separatists try to consolidate the gains resulting from the intervention of regular Russian forces into the fighting. The war of words between Russia and the West continues with Moscow insisting that it has the economic strength to withstand western sanctions; however, the evidence continues to mount that Russia’s economy is not doing so well. There has been no progress in establishing a natural gas supply to Ukraine as winter gets closer.

After decades of problems with oil theft, the Western oil companies continue to bail out of Nigeria. In the last four years, Shell, Conoco, and Chevron have either sold or are in the process of selling their large stakes in Nigerian oil production. With a lower presence of major western oil companies, it is likely that Nigerian oil production will decline in coming years.

The World Bank says China’s economy is slowing and expects its GDP to grow by only 7.2 percent next year. German industrial production contracted in August raising fears that recession in the EU is about to begin.