Oil futures have been volatile this week, swinging $1-2 a barrel on the latest news. New York crude closed Wednesday at $55.84 a barrel and London at $60.24, about where they have been for the last ten days. This week the up swings came from better economic news and the down days from increasing stocks. The weekly inventory report showed an unusual late December gain of 7.3 million barrels in US crude inventories. These inventories usually slide in December as refineries cut down on imports to avoid year-end taxes on oil in storage. Crude supplies at Cushing, Okla. grew by 973,000 barrels last week to 28.2 million, the highest since last March.
Evidence continued to accumulate that US shale oil production is likely to decline, perhaps substantially in the coming year. Continental Resources, a major player in the Bakken, announced that its capital expenditures next year would be only $2.7 billion, down from its original budget of $5.2 billion. The Bakken Shale rig count decreased by seven units last week to 180. The Texas Railroad Commission announced that new oil and gas drilling permits in November fell by roughly 50 percent from the number issued in October. Numerous smaller companies have announced cuts in their drilling budgests for next year.
A new analysis of Bakken shale oil production suggests that recently drilled and fracked wells are producing less oil than those drilled in past years. The percentage of water coming from new wells in the Bakken also seems to be on the rise. As the sweet spots of shale oil fields are intenisvely dirlled, we can expect that productivity of new wells will slowly decline and the costs of production per barrel will gradually increase.
The situation in Libya deteriorated further this week as fighting between Islamists and the Tobruk government spread to another export terminal, this time in western Libya. The Oil Protection Force has driven back the Islamist militists attempting to seize Libya’s two largest export terminals, but they remain closed. Analysts now believe that all of Libya’s oil production is going for domestic consumption.
Russia is having a bad week. Ukraine says that it is no longer non-alligned and wants to join NATO again. Although this is unlikely to happen, Moscow issued a sharp rebuke. Rosneft says that it may have to postpone ambitious plans to drill in the Arctic until prices recover. Moscow is moving again to stem the run on the ruble. It has ordered state-run companies to cut their holdings of foreign currency and covert them into rubles. As part of the move, the government says it will use state reserves to help the major companies pay-off foreign debts coming due next year. Many are afraid that Moscow eventually will have to impose currency controls if the ruble continues to decline. S&P has put Russia on a “creditwatch negative” which means that its bonds could be downgraded to junk status as soon as January.
US natural gas prices fell to circa $3 per million BTUs on Wednesday, their lowest level in two years, as an unseasonably warm December cuts heating demand.
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