A combination of a stronger dollar and an unexpected decrease in the rate of consumption (it’s hard to say “a decrease in the rate of increase in demand” without sounding confusing) has led to falling oil prices. The latest market data shows US crude oil imports dropping 2.3 million barrels/day from last week, and US crude oil stocks dropping 2.16 million barrels. US production meanwhile, remained flat at 5.14 million barrels/day. From Upstream Online:
Oil prices fell, nearing a five-month low hit the previous day, weighed down by a stronger dollar and concerns over weakening demand.
US crude fell as low as $101.43 and was trading 62 cents down at $101.92 by 1135 GMT.
London Brent slipped, outpacing the fall in US crude prices, to $97.85, the lowest level since early March.
Yesterday, US crude touched $101.36, the lowest price since early April, despite a surprise production cut by Opec of around half a million barrels per day.
Pressure came from a rising dollar and a report from the International Energy Agency (IEA), which lowered its oil demand growth forecasts due to a slowing global economy.
US government data showed falls in oil product demand, said Reuters.
“Improvements in (market) sentiment have not been seen even after Opec’s pledge on production cuts,” Japan’s Mizuho Corporate Bank said in a research note.
“A bearish development is likely to continue due to mid-term factors of lower demand amid a slowing global economy. The psychological $100 level will be tested.”
Limited support came from Hurricane Ike. It gathered strength as it churned through the Gulf of Mexico’s warm waters today on a track that would skirt the heart of the US offshore oil patch before slamming into the Texas coast late tomorrow or early on Saturday.
Oil output from the region was still less than 5% of normal after Hurricane Gustav spun through the same area.
Meanwhile, Oilweek is reporting that:
Gasoline prices, however, jumped at the wholesale level as hurricane Ike swept toward Houston, home to about one-fifth of U.S. refining capacity, and the site of a major fuel and grain distribution channel.
Wholesale gasoline prices on the Gulf Coast moved even further into uncharted territory to around $4.85 a gallon, as refineries anticipated that Ike would incur at least a significant pause in their operations, and at worst severe damage to their facilities.
As noted above and in several other trade publications, OPEC is cutting back production to stabilize their profit margins, but the cuts may not be fully complied with. Saudi Arabia in particular, has a long history of ignoring production ceilings which they themselves push through OPEC. In the past the Saud royal family has directly intervened in Saudi oil production to benefit the Bush presidencies, increasing production in contravention of OPEC agreements at critical times (the first Gulf War, for example). It will be interesting to see if they modulate oil production as part of an “October surprise” to help the Republican party. It’s happened before.
If, as I noted earlier this week, oil companies are evaluating new projects based upon an average future oil price of $70/barrel (using a base 2008 dollar value), then an reasonable inference would be that the oil industry has a fairly strong conviction that crude oil prices will stay well above $100/barrel for the long term. If crude oil prices drop significantly below $100/barrel (say in the neighborhood of $85 – $90/barrel) for several weeks between now and the elections in November, we should all be checking Saudi oil production rates for market manipulation.