Weekly Review

Oil prices surged last week with NY futures trading above $50 a barrel for the first time since July before settling on Friday to close at $49.63, the biggest weekly rise in six years. London oil futures closed Friday at $52.65, up 9.4 percent for the week. The move was prompted by the falling US rig count which has many traders convinced that US production will fall much further; a weaker US dollar prompted by a lack of Federal Reserve movement to increase interest rates; and stepped up Russian involvement in the Middle East which is likely to prolong turmoil in the region. There continues to be disagreement among analysts as to whether last week’s move will send oil prices to higher trading ranges, or is simply a repeat of last August when prices surged $10 a barrel only to fall off in a week or so. While the US rig count continued to drop last week most other indicators suggest the markets will be weaker in the immediate future so that the week’s surge was simply a case of “hot money” chasing headlines. US crude and gasoline stocks continued to grow the week before last, and Goldman Sachs remains adamant that this oil rally is not going to last.

Last week oil prices remained in the month-old trading range of around $45 a barrel in New York and $48 in London despite several major geopolitical developments and much news affecting oil’s fundamentals. However, the general situation of too much oil production and slowing economic growth remained intact. During the week, Russia announced that its production hit a new post-Soviet high of 10.74 million b/d, and along with the Saudis, Moscow shows no indication of being willing to cut oil production. US production is now down about 500,000 b/d from the high set in June, but this still seems inadequate to ease the oil glut. US oil stocks have climbed in eight of the last ten Octobers due to refinery maintenance, and there is no reason to believe that this will not happen again this year.

Oil prices closed out the week about in the middle of the range where they have traded for the past month — $45.70 in New York and $48.60 in London. During September, prices bounced a dollar or two on news suggesting that demand for oil could increase or production might decline. Conversely, news suggesting that demand might sink or production might increase sent prices back down about the same amount. It appears we could be stuck in this trading range until there are better indications that the oil glut is shrinking; or more definitive news about the course of the global economy – particularly China’s; or there is some major geopolitical upheaval.