1. Oil and the Global Economy
The petroleum complex fell yet again last week as supply outpaced demand. Brent crude has now dropped 20 percent from its June highs, closing Friday at $92.31. New York oil futures are down to $89.74. New York gasoline futures are down to $2.37 a gallon, the lowest since January 2011. The factors seen as contributing to the continuing slump last week were: a stronger dollar stemming from better-than-expected US employment data; concerns that the Saudis will not lower production to support prices; reports of a 413,000 b/d increase in OPEC production during September; and forecasts of lower global demand during the next 12 months.
Financial institutions such as Goldman Sachs are losing confidence that oil prices will move back above $100 a barrel in the next year. Traders expect that New York futures will establish a floor around $85 a barrel which would leave Brent trading around $88. Although the US economy has been doing better lately, partly due to increased domestic oil and gas production, lower crude imports, and increased crude and oil product exports, global demand has been generally weak. Economic difficulties are appearing for various reasons in the EU, China, Russia, to name a few. The increased turmoil in the Middle East and the need to counter the effects of climate change are taking a toll on global demand.
What is seen as increasing discord among OPEC members emerged last week with the announcements that the Saudis and Kuwait were unilaterally lowering prices in order to maintain their market share amidst faltering demand. Most OPEC states need every cent they can get from oil exports and have formulated budgets on the $100+ prices we have seen in recent years. Arab Spring and the various uprisings that are taking place across the Middle East as a result have contributed to animosities among Middle Eastern OPEC members as they side with different, sometimes warring, factions.
Evidence is growing that there will be considerably less money for exploration and development of new oilfields in coming years. Overall investment is seen as growing by only 5 percent this year as compared with 11 percent in recent years. Next year the growth is expected to fall to 4 percent, and giving the rapidly rising costs of exploration and development, this increase will result in less new oil production than would normally be expected. Much of the spending will be directed towards exploiting shale oil deposits in North America. Revenue from seismic explorations, which is an essential first step to finding new oil deposits, is expected to be off by 20 percent next year – a harbinger of what is to come.
The fight in Washington as to whether the US should allow greater exports of domestic crude continued last week with Exxon weighing in on the side of more exports and the refiners opposed. Some are saying that support for lifting the ban seems to be gaining in the Congress. The newest argument in favor of lifting the ban is that the US will gain more political influence over other countries if they become dependent on our oil exports.
resilience