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Prepared by Phil
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
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.
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.
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.
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.
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.
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.
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.
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
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