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World Awash in Oil Shields Markets From 2008 Price Shock

World Awash in Oil Shields Markets From 2008 Price Shock
By Lynn Doan, Grant Smith and Moming Zhou Aug 14, 2014
Fighting across Iraq , Libya, Ukraine and Gaza, and an accelerating economy, should
mean higher oil prices . Yet crude is falling.
Six years ago, oil soared to a record $147 a barrel as tension mounted over Iran’s
nuclear program and the world economy had just seen the strongest period of
sustained growth since the 1970s. Now, West Texas Intermediate, the U.S. benchmark
price, has traded below $100 for 10 days and Brent, the European equivalent, tumbled
to a 13-month low.
What’s changed is the shale fracking boom. The U.S. is pumping the most oil in 27
years, adding more than 3 million barrels of daily supply since 2008. The International
Energy Agency said yesterday that a supply glut is shielding the market from
disruptions. Bank of America Corp., Citigroup Inc. and BNP Paribas SA concur.
Iraq’s Oil
“ North America has pushed out an incredible amount of crude oil that it used to
import,” Ed Morse , the head of commodities research at Citigroup, said in a phone
interview from New York yesterday. “The world doesn’t need that much.”
The U.S. imported 7.17 million barrels a day of crude in May, a 26 percent drop from the
same month in 2008, according to data compiled by the Energy Information
Administration, the Energy Department’s statistical arm. Foreign deliveries will meet 22
percent of U.S. demand next year, the lowest level since 1970, the agency said
U.S. Growth
U.S. gross domestic product will grow 3 percent in 2015, accelerating from 1.7 percent
this year, according to the median forecast from 84 economists surveyed by
Bloomberg. Job openings rose in June to the highest level in more than 13 years,
firming up the labor market picture for the second half of the year, according to the U.S.
The nation’s output is forecast to climb to 9.28 million barrels a day next year, the
highest level since 1972, the EIA said. The agency cut its 2014 price forecast for WTI to
$100.45 a barrel yesterday from a July projection of $100.98.
-Oil Stocks Rise for First Time in Seven Weeks
Oil markets became more resilient to the threat of global supply disruptions because of
“spare capacity” and softer global demand, Francisco Blanch , the head of
commodities research at Bank of America in New York, said by phone yesterday. Saudi
Arabia , the world’s largest crude exporter, has been very reactive to oil price moves
resulting in markets that are the most stable since the early 1970s, the bank said in a
report today.
“Growth in oil demand was far outpacing our ability to physically supply oil” in the first
half of 2008, Harry Tchilinguirian , the head of commodity markets strategy at BNP
Paribas in London , said by phone yesterday. “The price of oil needed to rise promptly
to ration demand.”
Speculative Advance
The 2008 price rally was supported by investors pouring money into oil futures as they
sought alternatives to stocks. Today, speculative interest in crude is shrinking,
Tchilinguirian said. Net-long positions in both Brent and WTI fell to the lowest level in at
least six months in the week ended Aug. 5, according to data compiled by the ICE
Futures Europe exchange in London and the U.S. Commodity Futures Trading
“There was a bubble in the market in 2008,” with the view that the world was running out
of oil and other commodities, Morse said. “Everything changed soon after 2009.”
Brent crude for September delivery rose $1.26 to end at $104.28 a barrel on the ICE
exchange, after closing yesterday at the lowest since July 2013. WTI oil climbed 22
cents to $97.59 a barrel on the New York Mercantile Exchange .
Global Conflicts
Violence flared in Iraq, the second-largest producer in the Organization of Petroleum
Exporting Countries, in early June as Sunni Islamist militants captured towns in the
northwest and then pushed toward Baghdad . Clashes between political factions
intensified last month in Libya, where oil exports have been choked by political protests.
Israel deployed forces in Gaza last month with the stated aims of quashing rocket fire
and destroying dozens of infiltration tunnels. Tension between Russia and western
governments has escalated over President Vladimir Putin ’s backing of separatist
rebels in eastern Ukraine.
Retail gasoline in the U.S. has dropped 22.3 cents a gallon since peaking in April at
$3.696, data compiled by Heathrow, Florida-based AAA show. Prices are at a four-year
seasonal low and capped the biggest July drop in six years as the nation’s refiners ran
the most oil on record to take advantage of cheap domestic supplies.
Oil Demand
The recent decline in oil prices may prove to be just a phase as global demand is
forecast to pick up in the second half of the year, Bhushan Bahree, senior director of
global oil at IHS Energy, said by phone yesterday. Demand will rise 1.71 million barrels
a day to 93.45 million in the third quarter and climb again to 94.04 million in the fourth,
the Paris-based IEA said in a report yesterday.
“There are different moving parts when you go forward, and what we’re expecting now
may not play out the same way,” Bahree said from Washington . “I would still think we
are going to see more demand and there will be some support for prices.”
Global oil demand grew last quarter at the weakest pace since 2012, helping to calm
world markets amid the conflicts, the IEA said in its report. The agency cut estimates for
total growth in 2014 by 180,000 barrels a day.
OPEC Supplies
Supplies from the Organization of Petroleum Exporting Countries, which pumps about
40 percent of the world’s oil, rose to a five-month high of 30.44 million barrels a day in
July as Libyan output recovered and Saudi Arabia increased production, the IEA said.
Industry oil inventories in developed nations swelled in June to their highest since
September, the agency said. Stockpiles of crude and refined products in the
Organization for Economic Cooperation and Development increased for a sixth month in
June, by 13.8 million barrels to 2.67 billion, narrowing their deficit to their five-year
“Market participants are obviously fed up with events that are built up as geopolitical
risks, but which never realize as material disruptions in supply,” Eugen Weinberg , the
head of commodities research at Commerzbank AG in Frankfurt, said by e-mail
yesterday. “At the same time the demand growth has been rather disappointing.”
Libyan Oil
Libya loaded the first oil cargo from the port of Ras Lanuf since it was closed by rebels a
year ago. The tanker will soon leave port with 680,000 barrels of crude and head to
Italy, Ibrahim Al-Awami, the oil ministry’s director of measurement, said by phone
yesterday from Tripoli. State-run National Oil Corp. plans to double exports this month.
U.S. oil production is outpacing unplanned outages that cut into global supply, Adam
Sieminski , the EIA’s administrator, said by phone from Washington. Global outages
affected about 3.2 million barrels a day in July, up from 1.5 million at the end of 2011,
he said. U.S. output has meanwhile risen 2.61 million barrels a day since the end of
“Production is continuing to grow, and in the meantime, global demand is slowing down
a little bit and efficiency gains are beginning to have an impact,” Sieminski said. “It’s a
very positive story for consumers.”