Oil Prices Make Sudden Reversal

Crude oil is trading at 81.89 down by 32 cents having taking a making a hard reversal after the US Federal Reserve announcement and positive statement issued late on Wednesday. Crude oil was trading above the $82 price level mid-day on Wednesday. The weekly EIA inventory report showed a climb in stocks which also weighed on prices. World oil prices rose on Wednesday after data showed that US weekly crude oil stockpiles rose by less than expected in the past week.  Brent crude rose by $1.09 or 1.3 per cent to $87.12 a barrel while the US Nymex crude price rose by 78 cents or 1.0 per cent to $82.20 a barrel before reversing course.  Brent oil is in the red this morning at $86.97. The surge in the US dollar weighed down the commodities market and dollar denominated assets.

After three-and-a-half months of slow decline, the tipping point for the steeper drop came on Oct. 1, that’s when Saudi Arabia cut prices for its biggest customers. The move signaled that the world’s largest exporter would rather defend its market share than prop up prices.

The 29 percent drop since June of the international price caught traders and forecasters by surprise. After a steady buildup of supply and weakening demand, the outbreak of an OPEC price war is casting doubt on investments in new oil resources while helping the global economy, keeping inflation in check and giving motorists a break at the pump.

Libya’s production tripled since June to about 900,000 barrels a day, still 40 percent lower than two years ago, according to an official with direct knowledge of the matter. War hasn’t stopped production in Iraq, which is pumping 3.1 million barrels a day, within 10 percent of February’s 13-year high. The Organization of Petroleum Exporting Countries boosted September production to an 11-month high of 30.9 million barrels a day.

The drop in prices is a boom for US consumers, which sent consumer confidence to a seasonal high. It is estimated that every drop in pump prices helps add a billion dollars to the US economy. At the beginning of this week, the U.S. average retail price for regular gasoline was $3.06 per gallon, $0.64/gal lower than the June average price and the lowest average price for any week since December 2010. Falling crude oil prices have been largely responsible for the decline in retail gasoline prices. Typical seasonal declines in gasoline crack spreads, the difference between the wholesale price of gasoline and the crude oil price, have also contributed to falling pump prices. Current market prices and conditions indicate that a U.S. average retail price below the symbolic $3/gal mark is possible in the coming weeks.

EIA’s survey is consonant with survey results reported by AAA, which cited an average regular grade gasoline price on Monday of less than $3/gal at 55% of U.S. stations. Brent oil prices have fallen because of a weakening outlook for global oil demand growth, the return to the market of previously disrupted Libyan crude oil production, and continued growth in U.S. tight oil production. Brent prices are now the lowest they have been since late 2010, before violence in Libya and other areas in the Middle East and North Africa disrupted significant volumes of crude oil supply to the global market.