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Prepared by Phil Flynn

(October 1, 2014) Reasons Why Oil Prices Have Fallen
There are 101 reasons why oil has fallen as hard as it has, hitting a 2 year low. The main reason in the back of it all is U.S. oil production. Yet after a substantial drop out of the normal expected daily trading range my phone rang off the hook wondering why oil has fallen so far. Well there is short term and long term reasons and we will try to cover some of them in no particular order.
1.                  Rising U.S. Oil Production: I have already mentioned that the main reason behind the drop is the U.S. oil producer. The fracking revolution has changed this market in ways that few could have imagined just a few years ago. You have heard the statistics and the projections. Reports like we saw from the International Energy Agency yesterday that the U.S. is going to be the world’s largest liquid petroleum producer in just a couple of months and that by the end of the decade they expect that the U.S. will become the world’s largest oil producer. This production has been a buffer from a world of Geo-political risk that has had surprising effects on prices as U.S. oil Exports hit a 57 year high. It shows no sign in ending. The Energy Information Administration reported that increased drilling and improved drilling efficiency have led to significant crude oil production increases in the Eagle Ford region in southern Texas. These increases have occurred despite the region's relatively high well decline rates. However, by offsetting the natural declines through the use of new recovery techniques, further production increases are possible.

2.                  Rising Production In OPEC: While OPEC raised production  in response to  potential loss of Iraqi and Libyan oil production it seems that they over produced for a supply loss that in the case of Iraq never happened and in Libya was rather short lived. OPEC production hit the highest level since 2012 as Libyan oil came back in a big way. Not only is adding current production to the market they also have been adding a ton in storage. This oil is hanging over the market and is another reason why the Brent /WTI spread has come into the tightest levels in years.
3.                  The Rising Dollar: The soaring U.S. dollar and what it represents. With the U.S. talking about raising interest rates and the rest of the world needing to lower rates, this divergence is creating even more downside pressure for oil. China is struggling economically as is Europe lowering demand expectations and making oil more expensive in their currencies. Even the dispute with Russia and Ukraine which many thought would be a bullish event has turned out to be bearish as sanctions have further hampered growth in the Euro-zone. Data overnight confirms those fears. In  Germany the 10-Year Bonds sold for a Yield below 1% for first time in history.
4.                  Geopolitical events weighing on demand: The first case of Ebola in the U.S. may get people to restrict travel. We are already seeing the disease take an economic toll in Africa and as the disease spreads so too will the economic fallout. Not Very Good for demand expectations.
5.                  Protests in Hong Kong are also a negative yesterday: With the big Chinese National holiday happening this can’t be a positive for China’s economy. Chinas Government’s Purchasing Managers’ Index (CPMINDX) was at 51.1 in September, the same as August’s reading and compared with the 51.0 median estimates in a Bloomberg News survey of economists.
6.                  Energy Mix: The energy mix is changing. With the emergence of reliable supplies of natural gas and even electric cars renewable fuels, the previous projections of explosive oil demand growth have to be tempered.
7.                  US DEMAND: The market has been counting on the fact that an improving U.S. economy will increase demand. Still we have to be careful. Any weakness in U.S. data like we saw yesterday with the Case Sheller housing price number will lower those expectations. Besides it will be hard to have explosive economic growth consistently if our trading partners can’t get their act together. We have targeted $88 a barrel for some time and December crude is almost in the $80 handle.
8.                  Raising US Product Output: The reason why U.S. Liquid output is so high is the quality of U.S. shale oil. The Oil yields more products at cheap prices allowing refiners to produce more while helping to protect margins. This is a boom for U.S. drivers. AAA reported that consumers paid the cheapest September gas prices in four years. The monthly average at $3.39 per gallon, which was about 13 cents less than last year and 44 cents less expensive than 2012.
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October 1, 2014
Phil Flynn

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