Oil prices, which began dropping in mid-June when New York futures were trading around $61 a barrel and London was around $65, continued falling this week as oil inventories continued to rise. New York futures closed Wednesday at $49.19, the lowest since April, and London at $56.13. Once again the markets, which were expecting a decline in US crude stocks, were surprised by a build in inventories which increased by 2.5 million barrels last week despite refinery utilization rising to 95.5 percent of capacity, a new high for the year. A surge in crude imports to over 7.9 million b/d contributed to the inventory build. Stocks at Cushing, Okla. climbed by 813,000 barrels which increased the WTI/Brent spread to $7.
 
According to the Commodity Futures Trading Commission, hedge funds and other professional money managers have rarely been so pessimistic about the outlook for oil prices. The ratio of long to short positions is now down to 2:1 from 4:1 a month ago, close to the lowest it has been in the past six years.
 
There seems to be a global diesel glut developing. With China and Saudi Arabia opening large new refineries in the last two years, these countries are now producing considerably more diesel than can be absorbed by their domestic markets. Saudi exports of refined fuels have climbed to the highest level in 13 years. May shipments were 566,000 b/d up from 280,000 in April. Oil product inventories at Amsterdam, Rotterdam and Antwerp have climbed to a 20 year high of 6 million tons. Some fear a major price crash is coming as Europe runs out of storage capacity.
 
As prices continue to fall, concerns are increasing on Wall Street as to the quality of their loans to unprofitable oil and gas companies. Many banks are starting to set aside money to cover bad loans which eat into banking industry profits. In recent years Wall Street has been the biggest ally of the “shale revolution” by allowing companies to exceed their debt limits time after time in hopes that they would someday turn profitable. With US oil prices now below $50 a barrel and unlikely to climb significantly during the next year or so, bankers are demanding that drillers reduce their credit lines and increase equity. In response US oil producers have raised some $44 billion by selling bonds and shares in the first half of this year. More than $22 billion of the $235 billion of the debt owed by 62 North American oil companies, however, is “distressed” and unlikely to be paid back.
 
The debate over ratifying the Iranian nuclear agreement has begun. Iran’s Parliament plans to wait for 80 days before voting on the deal. In the US Congress and on the Presidential campaign trail there has been much posturing over the agreement. Iran’s leaders are paying homage to their hardliners by making it clear that the US and Israel are horrible countries and there will be no improvement in relations stemming from the nuclear agreement. There is much discussion about which countries can benefit from the agreement and how quickly Iran can increase its oil shipments if and when the sanctions are lifted.
 
The recent drop in oil prices is giving Moscow second thoughts about the economic recovery in 2016 that President Putin has been talking about.  Russia will face recession or stagnation if oil trades near $50 a barrel next year. If oil is trading near $40 a barrel, Moscow is facing a 7 percent decline in its GDP next year.