OPEC has cried wolf again, but there’s reason to believe that this time, the cartel is serious about constricting oil production. Which, of course, will send the price — and thus the price of gasoline — upward. And there’s nothing American drivers will be able to do about it.
Media organizations and analysts who follow the oil industry have been playing their sad fiddles for companies that once posted jaw-dropping profits. Stories seldom focus on the global benefit that low oil (and gasoline prices) provide to consumers, who have enjoyed a $3 trillion “transfer of wealth” since oil was at $115 two summers ago. Read more
Oil prices climbed took off in the final 30 minutes of Tuesday’s trading session, and analysts wondered whether the surge represented a temporary blip or the start of a comeback from a 7-month-long losing streak.
As Reuters noted, for most of the day oil was flat or slightly lower, owing to “data showing that U.S. crude oil stockpiles rose far more than expected last week.”
But Brent and U.S. crude each soared $2 late in the session. Brent, for February deliver, settled up $2.10 (4.5 percent), to $48.69 a barrel. That’s the biggest one-day advance since June 2012.
U.S. crude rose $1.01 (5.6 percent), to $48.48, the biggest one-day jump since August 2012.
Most dealers saw the late-day rebound as a temporary correction in the seven-month slump that wiped more than 60 percent off of oil prices, reluctant to call the bottom of a rout that has repeatedly defied forecasts of a floor.
“(With the) velocity of the downward trend that we’ve been in, you can expect to see violent snapbacks,” said Tariq Zahir of Tyche Capital.
Even so, there were growing signs that low prices were finally beginning to slow the unrelenting growth in U.S. oil production, a key factor for markets as OPEC powerhouse Saudi Arabia refrains from cutting output despite a growing glut.
North Dakota’s chief oil regulator said he expects production to be steady until mid-year and could decline in the third quarter.
The late rally was attributed to many traders holding expiring options, leading them to scramble to square their positions. As Oliver Sloup, director of managed futures at iitrader.com LLC, put it:
“A lot of shorts are so deep into their put options, the only way to exit their position is to buy back futures.”
American crude and the international benchmark, Brent crude, met at the same price point Tuesday: about $46. West Texas Intermediate crude, the U.S. benchmark, briefly traded below Brent, the first time that’s happened in a year and a half.
Brent closed down 84 cents, to $46.59 a barrel. U.S. crude closed down 18 cents to $45.19. Read more in the Reuters story.
On average, Brent traded at $6.64 higher than WTI last year.
Bloomberg offers a reason why U.S. crude might be on the upswing: The news agency reports that the United States might be edging closer to relaxing the ban on oil exports.
The 40-year-old ban on most U.S. crude exports is set to be loosened after Petroleos Mexicanos, Mexico’s state-owned oil company, asked to import 100,000 barrels a day of light crude. Senator Ted Cruz, a Texas Republican, plans to propose an amendment to a bill approving the Keystone XL pipeline that would lift the export restrictions.
“WTI is relatively strong because it looks like exports will be rising,” Michael Lynch, president of Strategic Energy & Economic Research in Winchester, Massachusetts, said by phone. “The Mexican request could be the first of many.”
Cruz must know something the rest of Washington doesn’t yet know, since President Obama already has promised to veto the Keystone XL bill if Congress passes it.
Has the precipitous slide in oil prices ended? For a couple days, at least. As The Wall Street Journal reported Friday, oil futures gained for a second straight day.
Here’s a (possibly prescient) quote from an analyst about where prices are going:
“I think we have seen a peak in downside momentum,” Citigroup Inc. analyst Tim Evans said. “We have probably seen a peak in the fear of demand weakness and the fear that OPEC may just stand back and let it drop. At this point I think the feel of panic over that possibility has probably eased.”
Wow. Over the last few days, the nation has seen the possibilities inherent in a transportation-related energy and environmental policy. No, Washington has not become more functional. It’s still a mess! Happily, Congress is out! (They weren’t doing much.) While they’re still being paid, we can at least turn down the thermostat in both the Senate and House Chambers. No new holidays have been created, and no new articles are being put in the Quarterly that cater to requests from constituents. Leaving town is consistent with one part of the Hippocratic Oath that guides doctors and at least vacations for congressman and women … do no harm!
The light in the energy-policy tunnel, or the canary in the policy mineshaft, results from the seeming collapse of the oil market. The price of Brent crude oil has fallen more than 20 percent since June, and on Friday it rose a little to $86.16 a barrel. The four-month drop in oil prices, caused mostly by an oil glut, falling demand and speculation related to both, likely will continue the recent trend toward lower gas prices at the pump, at least for the next few months. The U.S. average is now near $3.16 a gallon, reflecting a drop of about 15 percent since early summer.
The unseen hand of the marketplace — in this case, the actually relatively transparent hand of the marketplace — may provide a substitute for Congressional inaction concerning the presently complicated and sometimes weak policies that ostensibly protect sensitive global and U.S. land and water from harm. At $82 a barrel, oil producers and their investor colleagues have little incentive to invest heavily in tight shale oil. It just costs too much to get to and take out of the ground (or water). If the negative “opportunity costing” concerning decisions about future exploration and rig development become tougher, folks concerned with the environmental well-being of the Arctic Circle and the Monterrey Shale, etc. may end up smiling. They will see less drilling, fewer rigs, less GHG emissions and less non-GHG pollutants!
Apart from environmental benefits, falling oil prices will cause not-so-friendly and even sometimes-friendly Middle East nations to make difficult choices. They are reflected in the current dialogue within OPEC. Should OPEC and its member states sanction the production of more oil and contribute to the global surplus or lessen oil production targets to secure higher prices?
Both decisions, once made, have high risks. Raising prices by lowering production could lead to less market share and ultimately less revenue. Keeping prices low (and lower if the surplus continues to grow and demand continues to fall) could also mean less revenue and an earlier arrival of the time when production costs are near to, or exceed, returns for hard-to-get-at oil. Some Middle Eastern nations may not have a choice. Easy-to-drill oil is becoming increasingly hard to find, even in the once-productive oil-rich desert, and production costs are increasing, as they are around the world. It will be difficult to keep prices low. Yet if countries raise prices, they lose market share. Perhaps another compelling fact of life that Middle Eastern nations must look at is the increase in domestic needs brought about by the Arab Spring and the yearning for a better life among their citizens. Indeed, in this context, both lower prices and higher prices may limit their competitive abilities and result in declining revenue for national budgets. It will present them with a conundrum. Translated into political realities, countries in the Middle East may have less to spend on social welfare programs, exacerbating tension that already exists in the Middle East.
Low prices for oil, resulting from market variables, could well also provide another important international impact: Russia, already hit by sanctions, faces increased budget constraints because of the fall in oil prices. According to The Wall Street Journal, “Economists say falling oil prices could kill off Russia’s flagging economic growth, forecast at no more than 0.5% this year.” Apparently, some Russian economists see $90 as their economic tipping point.
Short-term projections of U.S. oil production suggest a continued (but more modest) decline of oil imports and dependency. But will U.S. oil surpluses and lower costs transfer into oil independence? No! The oil industry is pushing hard for, and is likely to secure, an increased capacity to expand crude oil exports from the federal government. However, trafficking in oil is, and will remain, a two-way street. Price, as well as profits, will be the determining variable. Imports now contribute about one-third of the oil used in the country. The number will hover around 30 percent at least for the near future.
Who knows? We might wake up one morning to find out from public television that we are selling oil to the oil-needy Chinese, while still buying it from countries in the Middle East and maybe even Russia.
There is another possible scenario (we cannot say probable yet) at least to consider in thinking about oil’s future. Because of the likelihood of increasing economic tension between objectives related to drilling for hard-to-get-at oil and its cost, we may go to sleep one night in the not-too-distant future, after hearing again on public television (of course) that oil companies are moving in a big way into the replacement fuel business and lessening their focus on oil. Assets will be sold and bought, followed by media attention suggesting that a major structural shift is occurring in the oil industry. Let’s anticipate what oil CEOs might say: “It’s tough to make the balance sheets work. Drilling for tight oil, really most of the oil left, is just too damn expensive in light of the uncertainty of prices and demand. While still only a small percentage of the overall fuel market, replacement fuels, including natural gas-based ethanol and renewable fuels, seem to be catching on. Detroit, our earlier partner in crime (not literally, of course) in restricting consumer choices to gasoline, hasn’t helped either, recently. It is producing more and more flex-fuel vehicles. Besides continuing to make money, we would like to get off the most disliked industry lists in America.”
Stranger things have happened!