Summary
Crude oil prices settled above $78/bbl on Friday. Growing industrial production caused optimism for an economic recovery. Oil investors shrugged off a dip in U.S. stocks prices that followed General Electric's poor earning report. The plunge of the U.S. dollar helped the price of crude oil last week. U.S industrial production rose in September for the third consecutive month.
Analysis
Investors are clearly nervous about the $1.4 trillion deficit for fiscal 2009. The exchange rate of the dollar versus the euro is near 1.5. The price of Brent crude is also up. Blent is the most popular reference crude for many of the world's profit sharing contracts. Motor gasoline consumption in the U.S. now exceeds 9 million bbl/day. That is up from 8.5 million this time last year. Increased gasoline consumption in the U.S. attracts imports from Europe where gasoline is in surplus. Total demand in the U.S. during the week of October 2 was 18.8 million bbl/day. That is up 900,000 bbl/day from the same period in 2008. So the bulk of the price pressure comes from these two changes. A third but not calculable factor is rising distrust of the dollar in the face of the U.S. Treasury's need to continue borrowing. Stories about abandonment of the dollar as the world reserve currency are in the headlines almost every day. Another factor is the relentless rise of crude oil extraction costs in the deep waters of the Gulf of Mexico, the Santos basin in Brazil and West Africa. Crude oil production is in decline in the North Sea and Mexico as well as the several land basins of the U.S. Expensive deep water oil is replacing cheap (relatively) Permian basin and San Joaquin Valley oil. The huge redeveloment projects of giant oil fields in the Persian Gulf region all generate new crude at much higher costs than the oil from declining old reservoirs. Still, in any prediction of crude oil (and natural gas) price trends, it is important to keep a close watch on worldwide economic recovery or lack of it. Things seem to be getting marginally better in Europe, much better in Asia, much worse in many parts of Africa and South America and running on empty in the U.S. Best guess is a gradual creep up in crude oil prices until large volumes of natural gas displace gasoline and diesel as transportation fuels in the U.S. This could take a few years given the opposition to it by many political constituencies.
Michael Lynch consults with leading institutions through GLG
Analyses are solely the work of the authors and have not been edited or endorsed by GLG.
