Crude Oil

The rally in crude oil seems to be running out of gas. That’s good for the US economy. Stable or even lower fuel costs should fuel consumer spending, which cruised along surprisingly well at the beginning of this year despite the surge in fuel prices. Stable or even lower crude oil prices should reduce inflationary pressures around the world. This is especially important in emerging economies since fuel costs account for larger shares of budgets than in developed economies. This would allow the central banks in China, India, and Brazil to continue to ease their monetary policies, as they have been in recent months. Let’s review the latest developments in the oil patch:

(1) Petroleum prices are sagging. The spot price of a barrel of Brent has dropped from this year’s peak of $128.31 on March 9 to $119.09 this morning. The price of WTI crude peaked at $109.77 on February 24 and has edged down to $104.31 this morning. The nearby futures price of a gallon of gasoline has dropped 26 cents from $3.42 on March 26 to $3.19 this morning.

(2) Supply disruptions remain a problem. Petroleum prices are weakening despite the worsening conflict between Sudan and South Sudan, which contributed to rising oil prices earlier this year. The two nations have been drawing closer to a full-scale war in recent weeks over the unresolved issues of oil revenues and their disputed border. Sudan’s output has plunged by 285,000 bpd to only 110,000 bpd over the past three months through March.

Over the same period, Iran’s oil production has plunged by 250,000 bpd. A week ago, malware discovered at an Iranian oil terminal forced Iran to disconnect key oil facilities. Authorities said a data-deleting virus prompted them to disconnect the main oil export terminal on Kharg Island in the Persian Gulf.

(3) A US pipeline goes from north to south. Yet despite these supply disruptions, oil prices have sagged rather than continued to surge as they did earlier this year. Last Tuesday’s WSJ identified two important reasons why petroleum prices are falling. First, the flow of oil in the Seaway Pipeline will be reversed sometime during the second half of May. That will free up crude oil bottled up in landlocked storage in Cushing, Oklahoma, giving refiners in the Gulf Coast region greater access to cheaper crude. This should continue to narrow the spread between the prices of Brent and WTI. It has already declined from a record $29.50 on October 13, 2011 to around $13 recently.

(4) Refineries may be restarted. Second, according to the WSJ, ConocoPhillips may reopen its Philadelphia-area refinery, which was closed last year. In addition, Sunoco said it is in talks with Carylye Group about a possible joint venture to keep open the 330,000-barrels-a-day Philadelphia refinery it had planned to shut this summer if it couldn't sell the facility.

(5) Usage is down in the US, while inventories are plentiful. Total petroleum supplied, on a 52-week average basis, fell to 18.7 mbd during the week of April 20, slightly below the previous cyclical trough in late 2009. Gasoline usage on this basis is down to 8.8 mbd, the lowest since January 24, 2003. Oilfield production rose to 5.7 mbd during the week of April 20, the most since February 20, 2004. As a result, US crude oil inventories are at a record high for this time of the year. Finally, the price of natural gas is so low that there is growing interest in bottling it up as a liquid and exporting it to countries where it fetches much higher prices.

(6) What about Iran’s bid to acquire nuclear weapons? That’s still the wild card. I’m inclined to believe that the sanctions imposed on Iran will force the Mullahs to stop their program. However, predicting developments in the Middle East is hazardous work. Last week, Israel’s top general said Iran is led by "very rational people" and doesn’t appear poised to build a nuclear bomb that would threaten his nation. Is he setting the Iranians up for a surprise attack?

Today’s Morning Briefing: Prosperity vs. Austerity (1) Fiscal Pact vs. Growth Pact. (2) Europe’s Party Party. (3) Only way to grow Europe isn’t under discussion. (4) LTRO-3 is coming, and it will be a Ponzi scheme. (5) Read her lips. (6) Globalization driving the bull market in earnings and stock prices. (7) Brinks and Apple. (8) Plenty of new record highs in the S&P 500. (9) Staying sector-neutral, on a tactical basis, for now. (10) US economy’s boom-to-bust sectors still down and out. (More for subscribers.)