First published by ASPO-USA
New York oil futures climbed some $2.50 a gallon last week to close Friday at $93.50. Meanwhile Brent futures sustained a 1.4 percent loss for the week, closing out at $97 a barrel thereby reducing the WTI/Brent spread to $3.45. US futures were helped by an unexpected drop in crude stocks; higher than normal refinery utilization rates; an unexpected jump in the US GDP during the 2nd quarter; and concerns about a gasoline supply shortage along the east coast. In general oil traders believe the demand for oil products in the US is growing, while demand elsewhere is shrinking.
The continued growth in US tight oil production is raising hopes for better times ahead. The EIA expects US crude production to grow to the highest level in 45 years during 2015 when it will reach an average of 9.5 million b/d. US oil imports are to shrink to only 21 percent of US consumption. Wood Mackenzie, a perpetually optimistic firm of energy analysts, says that new techniques of producing tight oil will be in use by 2020 that could increase recovery rates by 100 percent and send production US oil production up by 1.5 to 3 million b/d.
The recent price decline has many crude exporters, who have become dependent on high oil prices, calling for lower OPEC production in order to drive prices higher. Iran, which is now saying that world prices could fall to $90 a barrel by next March, has been calling for lower OPEC quotas, especially for the Gulf Arab states whose production is not constrained by other factors. Although OPEC’s Secretary General suggests that the cartel could lower the 30 million b/d quota at its November 27th meeting, such a cut has not yet been agreed on, and OPEC’s most recent report suggests that demand for its oil will slip to 29.2 million b/d next year anyway.
For the past two months, US natural gas futures have been cycling between $3.85 and $4.10 per million, reflecting uncertainty among traders as to what the coming winter will bring. Last winter’s unusually cold weather brought US natural gas reserves down to record lows raising the issue as to whether they could be replenished in time for the winter of 2014-2015. Mild summer temperatures and increases in natural gas production have gone a long way towards replenishing the stocks; however, they still remain about 13 percent below normal for this time of year.
With the heating season only a few weeks away, uncertainty exists about what will happen next. Forecasters are already talking about another unusually cold winter which, coupled with low reserves, could cause prices to explode. Natural gas prices, which are among the most volatile of the traded commodities, having reached a high of $15.65 per million BTUs in October 2008 – some four times the current trading price. Although production of natural gas from the Marcellus Shale has been increasing steadily in recent years, new sources of demand from power companies looking for cleaner energy and newly minted LNG exporters looking to profit from much higher prices in foreign markets are likely to add to demand. For the immediate future, however, the key price determinant is likely to be temperatures in the US during the next six months.