Oil prices continued to fall this week, capped by a precipitous drop after the EIA said US crude stocks had increased the most since record keeping began in 1982. New York futures closed Wednesday at $45.34 after sinking to a five-year low of $44.96. London closed at $46.86. In October, London futures reached a one-year high of $53.73, and NY traded at $51.93. Analysts, including Goldman Sachs, are now talking about prices sliding into the low $40s soon. The bad news for oil prices kept flowing in all week. In addition to the 14.4-million-barrel build in US crude stocks, OPEC production was reported as reaching a record high of 33.8 million in October despite declines in Saudi and Angolan production. Nigeria reported its output has recovered to 2.1 million b/d; Libya has doubled its production since mid-September and is now producing close to 600,000 b/d; Iraq pumped an additional 50,000 b/d; and Russian oil production set another Post-Soviet record. Amid these bearish reports, OPEC and other oil exporters continue to fuss over production cuts. Even if an agreement is reached at the OPEC meeting, few believe it will result in meaningful cuts in oil production or that the two years of oversupply are coming to an end.
The head of the EIA announced that US crude production is expected to fall by 800,000 b/d this year, the first drop since 2008. While US production has been dropping, the EIA has been forecasting production declines ahead of the curve. There has been much discussion about the impact of “zombie drillers” in the US. These are firms that have gone into bankruptcy but keep pumping out oil just rapidly as before. Bankrupt US drillers are producing roughly 1 million b/d, about the same as before bankruptcy. If these companies were actually dead and not living on other people’s money, US production would be considerably lower and prices likely higher.
Analysts are hailing the impending merger of GE with Baker Hughes as a stroke of genius that will create the world’s second-largest oilfield services provider. By combining GE’s strength in making state-of-the-art oilfield equipment with Baker Hughes expertise in drilling and fracking, a stronger company could emerge.
The world’s problems continue to bubble along. ISIL has torched numerous oil wells creating a giant environmental mess around Mosul. The Maduro government is suggesting that hungry Venezuelans living in cities should go outside and find some place to grow their food. Fears are on the rise about the state of China’s numerous economic bubbles. Prices are surging, and the whole place looks right for a major economic correction – or worse. The Russian economy seems on course for another bad year in 2017 according to a former finance minister.
There has been much discussion lately as to whether better batteries, which seem to be coming to market in the next few years, could make a significant dent in the demand for oil. This will be especially true if oil prices spike in the 2020s again as solar and other forms of renewable energy become much cheaper. Elon Musk’s announcement of a solar roof combined with adequate electricity storage capacity is raising much interest.
