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More oil price volatility

The steady rise in world oil prices in the first half of the year has given a flicker of hope to an energy industry whose profits have taken a serious hit.  There have even been a few new fracking operations in the US shale patch, while the banks have agreed to roll over the loans made to unprofitable North Sea oil companies.

But many of the supply side problems over the past few months have now been fixed.  Canadian tar sands production is back up following the wildfires in May.  Nigerian rebels have agreed a ceasefire with the government.  And most importantly, OPEC has failed to negotiate a freeze on production.

This suggests that it is the demand side that is keeping prices up around $50 per barrel on world markets.  However, according to Julian Lee at Bloomberg, estimates of future demand on which oil prices are based may be fundamentally flawed.  This is because prices tend to be set using weekly US data rather than much more accurate (but longer to produce) monthly data:

“It’s the discrepancy between the two sets of data that gives cause for concern.  When taking the weekly figures, it looks like U.S. gasoline demand is soaring. According to those data, it’s been on a steady upward path all year, reaching a record high of 9.8 million barrels in the week ending June 17, with the summer driving season barely started. But the latest monthly data, showing the numbers for April, paint a very different picture.

“They show U.S. gasoline consumption falling between March and April and imply a downward revision of April demand of 260,000 barrels a day, or 2.7 percent, from the preliminary figures. That might not seem a lot. But when the same agency forecasts that U.S. gasoline demand will grow overall this year by just 170,000 barrels a day, it’s enough to change the whole outlook for one of the few countries where demand is robust.”

Since the USA consumes a quarter of the world’s oil, falling demand there more or less guarantees a general fall in global demand.  However, Lee points to Brexit and to falling demand across the world economy as additional demand-side problems.

Taken together, the increased supply and falling demand suggests another near-term fall in oil prices that can only exacerbate the capital flight that has devastated the North Sea and the US shale patch.  This, in turn, means that sometime in 2017 or 2018 oil prices are going to spike up to eye-wateringly high prices… with all of the economic devastation that that entails.

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