Mid-Week Update

The price plunge which began in mid-June when New York oil futures trading around $105 a barrel continued this week with oil touching $80 on Wednesday before recovering to close at $81.78. London’s Brent crude underwent a similar collapse to close yesterday at $83.46. Weak demand: increasing US shale oil production: a stronger dollar; and the refusal of the Saudis and its Gulf Arab allies to cut production combined to trigger the decline. US retail gasoline fell to an average of $3.17 a gallon, the lowest since February 2011. The weekly stocks report will be delayed until Thursday, but analysts are expecting a 2 million barrel increase in US crude inventories.
 
The IEA confirmed the weakness in the world oil markets this week by cutting their forecast for the increase in global oil demand by this year by 250,000 b/d from last month’s estimate. The Agency now believes that growth in consumption this year will be only 700,000 b/d, but will increase to 1.1 million b/d in 2015 as the global economy improves.
 
Speculation is rife as to why the Saudis are refusing to cut production and making an effort to increase their market share by lowering oil prices and strong-arming clients to take more of their oil. Some see a conspiracy between the Saudis and the US to hurt the Russian and Iranian economies by cutting their principal source of income. Others say the Saudis want to drive marginal US shale oil producers out of business thereby eliminating a source of competition. Given that the Saudis and the Gulf Arab oil exporters have very large currency reserves, the Saudis are saying that they are willing to see $80-90 oil for a year or two if it will further their other objectives.
 
There is much concern about what will happen to US shale oil production now that prices are circa $25 a barrel lower than they were last spring. This has led to much speculation and discussion about just what it costs to produce a barrel of shale oil these days. The optimists maintain that there have been so many technological advances in drilling for shale oil in the last couple of years that current costs of production are much lower than many analysts believe and that US shale oil production can keep on growing for another year or two unhindered by lower selling prices.
 
The IEA in Paris, which has been optimistic about the prospects for US shale oil production, says that only 2.6 million b/d of global oil production comes from projects with a breakeven point above $80 per barrel and that “close analysis of the US light, tight oil supply suggests that most of it remains profitable above $80 a barrel”. It should be noted that the 1.1 million b/d of Bakken, North Dakota production is currently selling for only $66 a barrel, down from $86 last July.  Some analysts point to the 600 drilled, but not-yet-fracked, wells in North Dakota which could allow production increases even with a slower pace of drilling. Others believe that shale oil companies are so heavily invested in their drilling programs that they will continue drilling for a while even if US oil falls below $75 a barrel. Some oil plays are said to be profitable even with oil at $50 a barrel.
 
Natural gas futures have been volatile this week, trading between $3.77 and $3.95 per million BTUs as the markets try to decide what demand will be like in the coming winter. New long range forecasts are due in about a week. For what it is worth, it has been snowing heavily in Siberia during the last two weeks which some believe is an indicator that it will be unusually cold in North America this winter.
 
The US bombing campaign against ISIL oil facilities in Syria is said to have already reduced production by 70 percent to only 20,000 b/d.