Peak Oil Notes – Aug 27

Oil prices fell sharply on Monday in response to another sell off in China’s stock markets, trading for a while below $38 a barrel in New York; rebounded on Tuesday; and were down again on Wednesday with New York closing at $38.60 and London at $43.14. Both markets closed less than a dollar above the recent lows set on Monday.
 
 While the weekly US crude inventory was down by 5.5 million barrels, this was offset by a large increase in gasoline and other oil products which left total commercial petroleum inventories up by 2.9 million barrels. This left total commercial inventories at 1.28 billion barrels, a record in data going back 25 years. Traders also noted there was a 840,000 b/d drop in imports last week which many considered to be an aberration with larger imports expected in future reports. Crude stocks at Cushing, Okla. rose for the second week in a row, this time by 256,000 barrels.
 
In two weeks, the summer driving season will be over; refineries will be into fall maintenance, cutting demand; and commercial crude supplies will be moving higher, testing storage capacity limits in some parts of the country.  While Chinese demand for spot oil has been strong this month, most observers believe much of this oil is still going into strategic reserves and is not being consumed. China’s diesel consumption, an indicator of economic activity, has been dropping of late.  Given that production remains strong and that numerous seasonal factors will be cutting demand in the next few weeks, some analysts are continuing to talk about oil prices dropping below the 2009 lows of less than $34 a barrel in the near term.
 
The sharp drop in prices on Monday also has analysts ruminating about where the markets are going over the next year.  Expectations of an early rebound are fading. One firm is estimating that the average US rig count for 2016 will be down by about another 60 rigs. All agree that the oil industry is not sustainable in its current configuration at the going prices and that production is going to have to shrink.
 
There continues to be much discussion as to why US gasoline prices are not falling as rapidly as crude prices. Most of the blame is being placed on the outage at the large BP refinery in Indiana. On Wednesday BP, however,  announced that the largest of its three distillation units was back in service and that the refinery would be slowly getting production back to normal, but gave no dates by which this will be achieved.
 
The EIA reported that US crude production was unchanged last week at 9.3 million b/d. Bentek Energy, which tracks oil production, said production in the Bakken was up slightly in July and that drillers there have made progress in cutting the time and costs involved in drilling a well.
 
Overseas, Russia, Venezuela, Nigeria, and Iraq are falling deeper into economic holes due to low oil prices. Many are predicting political instability will develop soon particularly in Venezuela, Nigeria, and Iraq. Russia’s ruble hit a recent low on Monday amid predictions that its GDP is expected to slump further. Beijing is trying every trick in the book to revive its economy.