Oil prices climbed for the fifth straight day on Wednesday after a drop in the US crude and gasoline inventories and a weaker dollar added to the clamor about the possibility of an OPEC+Russia oil production freeze in late September. Nearly all serious analysts of the issue maintain that the Saudis and Russia will not freeze production unless Iran does. On Tuesday Tehran reiterated for the umpteenth time that it would continue to increase its production until it reaches its rightful pre-sanctions level of production, but optimism that oil prices will climb remains strong in the futures community. Crude has now gained about $7 a barrel since yet another round of production-freeze hype began two weeks ago. Technical analysis shows that the market is approaching an overbought situation and is due for a correction soon. Oil futures closed on Wednesday at $46.79 in New York and $49.85 in London.
There were several reports this week that could put a lid on further price gains. Reuters reported that the Saudis might increase production in August to a record 10.8-10.9 million b/d, making the kingdom the world’s top oil producer. The US oil rig count has risen without pause for seven weeks suggesting that the ongoing drop in US shale oil production will be slowing. The EIA said this week that it is revising its estimates as to how fast US production is falling as drillers are producing more oil with fewer rigs than many thought possible. Minutes from the Federal Reserve meeting suggest that an interest rate increase could be coming in September which would likely push the dollar higher and oil prices lower.
A current unknown is the effect that the heavy rains in Louisiana will have on all the refining (18 percent of US capacity) that takes place in the state. Should some refining be forced to shut down, there would be less oil product produced and less demand for crude. Given the size of the current oil glut and record amount of oil and products in storage, temporary shortages are likely to have little impact on prices.
One analyst notes that a good portion of the crude drawdown last week was along the West Coast which is largely isolated from the rest of the country. Supplies on the east coast, where there is already a shortage of storage capacity, remain plentiful.
Around the world, Russia has begun bombing Syrian rebel positions including those backed by the US and towns from a base in Iran. In the last week or so there have been reports that the rebels have been able to push back the government/Iranian/Hezbollah assault on Aleppo. Moscow’s action is only going to prolong the war and further inflame the Sunni-Shiite hostility. In Libya, the move towards increased exports seems to be on hold due another round of bickering among all the parties involved. In Iraq, government forces, most Kurdish, backed by US air strikes and artillery continue to move towards Mosel.
As could be expected, Venezuela continues to come unglued, with its oil production now believed to be down by about 300,000 b/d in June from last year. The national oil company, which is worried about how to pay off its bonds, is making fewer investments in production and is not paying much to the oil service companies that continue to drill.
The unprecedented floods in Louisiana are reviving the issue of climate change which much of the US is still ignoring. Bloomberg ran a story this week pointing out that 20 square miles of Louisiana are being swallowed each year by the Gulf of Mexico. In some areas, the shoreline is receding by 3 feet every month. The sea level rise is threatening $100 billion in energy industry infrastructure; the industry owns more than 80 percent of Louisiana’s coast.
