Author: Tom Whipple

It was a volatile week with stock markets crashing and oil prices falling by nearly $7 a barrel from recent highs. Behind the price collapse was a stronger dollar, the break in the equity markets, ever increasing US shale oil production, and an unexpectedly large jump in the rig count the week before last. At Friday’s close New York oil futures were slightly below $60 a barrel and London’s Brent was not far behind at $62.79. With the Brent/WTI price spread below $3 a barrel, there will be less incentive to buy US crude when shipping costs are considered.

Oil prices fell for most of last week, but then rebounded to close at $56.55 in NY ($62.73 in London) on Friday. This was only a dollar or so a barrel below the recent high set the week before last. As usual, there were numerous factors impacting oil prices. OPEC reported a small drop in October production due to lower output from Iraq, Nigeria, and Iran. OPEC also said it expects global demand for oil to grow by 1.5 million b/d this year and again in 2018. The IEA is not so sure that demand will be so strong, noting that crude prices have risen by roughly 20 percent since early September and now the “market balance in 2018 does not look as tight as some would like and there is not, in fact, a ‘new normal’.”

Oil prices leveled off last week with New York futures closing at $56.74, up more than $20 a barrel since June.  Brent closed about $7 higher at $63.52. As has become normal these days, multiple factors impacted the oil prices last week pulling the markets in both directions. While the arrest of over 200 important princes, ministers and industrial leaders in Saudi Arabia on charges of corruption early in the week roiled the markets for a few days, by the end of the week the markets were largely ignoring what could morph into a major Middle East crisis or even hostilities.

The price surge, which began in mid-September, continued last week with NY futures closing Friday at $55.64 and London at $62.07. The $6.50 spread is leading to ever higher US exports which are now above 2 million b/d. Crude prices are at their highest level in over two years. Behind the price surge has been the steady stream of hints from the Saudis and the Russians that they are ready to back an extension of the production freeze through 2018 at the November 30th meeting. Some are asking whether the major oil exporters will be willing to continue a production freeze if prices move much higher. There now is a solid perception among traders that the global crude stocks are declining and that demand is rising. This in addition to the OPEC hype is contributing to the price surge.

London futures closed above $60 a barrel last week for the first time since 2015. New York futures are now about $6 a barrel lower than London, increasing the incentive for foreign refiners to buy and export more US oil.  The main impetus for the price surge on Friday was comments by Saudi Crown Prince bin Salman that he backs an extension of the OPEC production freeze until the end of next year. Coupled with the Prince’s statement were upbeat OPEC pronouncements about the increasing demand for its oil and the dubious proposition that compliance with the production cut was now at 120 percent of the agreed numbers. Beyond the hype, however, are real concerns that the Iraqi, Iranian, and Venezuelan situations could deteriorate and lead to lower exports.