Weekly Review

The great oil price slide of 2014-15 is taking on epic proportions. US futures traded for a while below $40 a barrel on Friday while Brent closed out at $45.46. Last week the financial press struggled to find an historical comparison to what is taking place in the oil markets. Some papers finally settled on the price crash of 1986 which sent oil prices down to $10 a barrel and led to the demise of the Soviet Union as the most apt. The now familiar forces of too much oil in inventories with nobody moving to cut production; China’s exports, manufacturing, yuan, and stock markets continuing to drop with still more problems in sight; and the prospect for increased Iranian exports after the nuclear agreement is ratified; all contributed to the falling prices. Many sense a decisive shift in the oil markets overall appraisal of the situation with those expecting a price rebound at any minute throwing in the towel and acknowledging that those not expecting a substantial price increase until late 2016 or even 2017 are probably right.

Oil prices have now had a 7th consecutive weekly loss with New York futures closing Friday at $42.50 and London at $49.19. Last week Beijing’s devaluation of the yuan joined the 2 million b/d oil glut and an unplanned outage at a major US refinery to send oil prices lower. Traders now are talking about prices falling into the $30s. The week’s new data included: US crude stocks falling a bit, but not as much as expected; new forecasts from the IEA and EIA which predict that the glut will continue and US production will fall until late in 2016 at which time production and oil prices will rise; the monthly report from North Dakota saying that shale oil production continued to rise in June and that its well-head prices are now down to $28 a barrel; and that the US rig count was up slightly the week before last.

Oil prices continue to fall with New York futures closing Friday at $43.87 and London at $48.61, both down 7 percent for the week. There was the now usual mid-week bounce as traders anticipated that US crude inventories would decline. This time they did fall for the third straight week, but record refining simply turned the crude into inventories of oil products leaving the total stockpiles of commercial crude oil and products largely unchanged at the time of year when it usually drops due to heavier summer demand.

Last week started with the China’s stock markets suffering the biggest one-day loss in eight years. After that it was mostly down hill for the oil markets. There was a bounce after the Wednesday stocks report showed a larger-than-expected, 4.2 million barrel, drop in the US crude inventory, but by the end of the week prices were falling again. At the close Friday New York futures were down to $47.12, the lowest close since March 20th, and London was down to $52.26. The week’s losses left US oil futures down 21 percent during July and Brent down 18 percent, the largest one-month losses since last December. The price drop in July was the largest since the 2008 financial crisis.

The slide in oil prices continued with New York futures closing Friday at $48.14, down 6 percent for the week, and London futures closing at 54.42, down 4.3 percent during the week. This time the decline was aided by an increase of 21 rigs drilling for oil in the US suggesting that US shale oil production will increase or at least decline more slowly. The decision to reactivate these rigs was likely taken a month or more ago when prices seemed to be stabilized around $60 a barrel. In addition to the increase in rigs, the now normal factors of a stronger US dollar, a contracting Chinese economy, increasing inventories, and higher oil output from Saudi Arabia and Iraq contributed to the falling prices. The prospect that more Iranian oil will be coming on the the market before the end of the year also keeps pressure on the market.