Oil prices continued to fall this week as crude and gasoline stocks continued to grow. US summer driving season demand, while higher, was not enough to offset increased gasoline production. On Wednesday, New York futures touched a low of $41.68 a barrel, the lowest since April, and London hit a low of $43.33, the lowest since May. Both prices inched closer to their 200 day moving averages, suggesting that further declines are in store if these indices are breached. Some are expecting prices to break below $40 a barrel in a matter of days, and a few are saying that prices will have to fall below $30 again to pressure the markets into rebalancing. In recent days hedge funds have been bailing out of their long positions in the oil futures markets.
In addition to increased crude and gasoline stocks, the EIA reported that refiners cut their utilization rates by 0.8 percent last week, which is an unusual occurrence for the peak of the summer driving season. Refining profit margins which have helped the large integrated oil companies weather the low oil prices of the last two years have been falling in recent weeks adding to the oil industry’s problems.
The US oil rig count has increased by 45 rigs since the end of June, suggesting that some shale oil drillers believe that they can produce oil at least marginally profitably with prices in the mid $40s. If the history of the last two premature price surges is any guide, then we should see a decline in the oil rig count begin soon as prices fall towards $40 a barrel.
The situation in Libya has been a yo-yo recently. In recent days we have had announcements that the two rival oil companies had agreed to merge and that the Petroleum Facilities Guard which controls the major export terminals had agreed to let exports take place. This week, however, we have had reports that the facilities guard wants to be given large amounts of back pay before exports resume. This announcement was by the Libyan army which controls what is left of the Libyan Air Force, announcing that it will bomb any foreign oil tanker attempting to load Libyan crude. It is clear that the Libyan political situation is as muddy as ever and that it will be a while before substantial oil exports are resumed. At least the Libyans are not selling off their crude at rock-bottom prices.
The situation in Nigeria is not much clearer. The Nigerian government reports that its oil production is now around 1.5 million b/d, down about 700,000 b/d from the normal 2.2 million. Some outside observers are saying that production could be as low as 1.3 million b/d.
