Oil prices continued to climb this week with London futures closing at $52.51 and New York at $51.53. US crude stocks fell for the third consecutive week, this time by 3.2 million barrels, but oil product inventories continued to climb leaving total commercial stocks up by 3.2 million barrels. The increase in gasoline stocks was a surprise as it comes during the opening weeks of the summer driving season. Some believe that the growing gasoline glut may put a cap on prices. The EIA also estimated that US crude production increased by 10,000 b/d last week, suggesting that $50 oil is enticing producers to pump faster.
The major forces behind this week’s move are the growing problems in Nigeria and Venezuela. The Nigerian government says that its oil production is down by 700,000 to 800,000 b/d, but some outside observers place the number at well over 1 million. While the government is talking about negotiations with the militants and is moving some military forces from the Delta as a sign of goodwill, the militants say they are not negotiating with anybody. To make the point, on Wednesday, they blew up another oil well. Shell announced this week that it will no longer repair pipelines shut down by sabotage until a political settlement is reached. Several major oil export terminals, including Forcados, Brass River, and Bonny light, are now under force majeure and exporting little or no oil.
Chinese crude imports fell to a four-month low in May due partly to port congestion. There also are indications that Beijing’s cheap crude buying for its strategic reserve may be ending and that domestic oil demand is contracting. Outside of strong domestic auto sales, there have been no indications that the Chinese economy is doing markedly better of late. A weaker dollar, which hit a five-week low this week, is contributing to the steady rise in oil prices.
With crude prices nearly doubling since February, the US shale oil industry is stirring once again, but prices are still well below a level that will restart a boom and reverse the downturn that is underway. Bankruptcies and panic asset sales continue to plague the industry.
The World Bank continues to be pessimistic about the prospects for global economic growth. Its latest forecast cut global growth in 2016 from 2.9 to 2.4 percent with India growing at 7.6 percent and China at 6.7 percent while Russia and Brazil continue to contract. Venezuela is to contract by 8 percent. The weak US employment data released last week does not help the outlook for oil demand either.
Venezuela’s death spiral continues, increasing the probability that at some point it will stop exporting oil. The food shortage is starting to turn into mass starvation as there is little to no food available in many stores. The opposition seems to have given up trying to oust President Maduro. So far there have only been scattered anti-government demonstrations, but these have been broken up by security forces. There is no end to this crisis in sight, short of mass demonstrations or a military coup. Washington is taking a hands-off approach amid a string of government charges that the US is trying to steal Venezuela’s oil.
