After bouncing around, oil prices finished off the week with just a bit less volatility than when it started the week. WTI stayed at around $46 per barrel as of midday on September 4, with Brent holding at $50 per barrel.
Aside from supply and demand fundamentals in the oil markets, central bank policymaking is another major factor determining the trajectory of oil prices. The European Central Bank hinted that it might consider more monetary stimulus to help the stagnant European economy. Oil prices rose on the news. The markets, however, are waiting on a much more significant announcement from the Federal Reserve this month on whether or not the central bank will raise interest rates. This summer’s market turmoil – the Greek debt crisis and the meltdown in the Chinese stock markets – has dimmed the prospect of a rate increase.
Moreover, the global economic unease may begin to reach American shores. On September 4, the U.S. government released data for the month of August, revealing that the U.S. economy added only 173,000 jobs, a mediocre performance that missed expectations. Although an economic slowdown is no doubt a negative for oil prices, the news could provide enough justification for the Fed to hold off on raising interest rates. A delay in a rate hike could push up WTI and Brent.
Although a slew of Canadian oil sands projects have been cancelled due to incredibly low oil prices, several large projects were already underway before the downturn. With the costs of cancellation too high, these projects continue to move forward. When they come online – several of which are expected by 2017 – they could add another 500,000 barrels per day in production, potentially exacerbating the glut of supplies not just in terms of global supply, but more specifically in terms of the flow of oil from Canada. Canadian oil already trades at a discount to WTI, now at around $15 per barrel.
That means that when WTI dropped below $40 per barrel last week, Western Canada Select was nearing $20 per barrel. With the latest rebound to the mid-$40s, WCS is only around $30 per barrel. But with breakeven prices for many Canadian oil sands projects at $80 per barrel for WTI, oil operators in Alberta are no doubt losing sleep over their current situation. One important caveat to remember is that unlike shale projects, Canada’s oil sands operate for decades, so the immediate downturn does not necessarily ruin project economics. However, with a strong rebound in prices no longer expected in the near-term, high-cost oil sands projects are probably not where an investor wants to be.
Low oil prices continue to take their toll. Bank of America downgraded BP to “underperform” and warned that its dividend policy faces risks.
The EIA released a report this week that showed that there would be little effect on gasoline prices if the U.S. government lifted the ban on crude oil exports. In fact, gasoline prices could even fall because refined product prices are linked to Brent much more than WTI, so more supplies on the international market would push down Brent prices. The report lends credence to the legislative campaign on Capitol Hill to scrap the ban, a movement that is picking up steam. On the other hand, although few noticed, the EIA report also said that the refining industry could lose $22 billion per year if the ban is removed.
So far, many members of Congress have been reluctant to weigh in on this issue for exactly that reason: it pits drillers against refiners, both of which are powerful political players. But with the potential blowback from a spike in gasoline prices no longer a huge worry, the oil industry is gaining a lot of allies in its attempt to lift the ban. However, there is an elephant in the room: the 2016 presidential election could blow up any chance of meaningful energy legislation next year. Although several Republican candidates have come out in support of lifting export restrictions, the fear of attack ads could scare away others. If the issue becomes bogged down in presidential politics, it could ultimately kill off the legislative push.
Saudi Arabia’s King Salman arrived in Washington on September 4 to meet with U.S. President Barack Obama. The two leaders will discuss the Iran nuclear deal, a deal that the Saudi King had strongly opposed from the start, but has since begrudgingly warmed up to following security promises from the United States. If they can manage to stay on the same page with the Iran deal, the two leaders will then discuss the ongoing conflicts in Syria and Yemen. There is obviously little to no prospect that such intensely complicated conflicts will get sorted out in the near future, so more modest goals for the trip include simply building trust between the two countries. Although long-term allies, Saudi Arabia has become more mistrustful of the U.S. President following the thaw in relations between the U.S. and Iran. The trip follows what the media has called a “snub” when King Salman declined to come to Washington this past spring for a summit of other Gulf state leaders.
An oil spill closed part of the Mississippi River after two tow boats collided on September 3. One of the boats was carrying slurry oil, which spilled into the river. One of the ruptured tanks holds 250,000 gallons, but the exact amount that spilled was unknown. The Coast Guard is working with the boat’s owner – Inland Marine Services – to determine the extent of the damage.
Russian President Vladimir Putin met Venezuelan President Nicolas Maduro in China this week, and the two sides apparently discussed ways to stabilize oil prices. Maduro says that they agreed on “initiatives” to address low oil prices, but did not elaborate with details. In all likelihood, Maduro is engaging in a degree of bluster and wishful thinking. Neither side has the capacity to cut oil production as both are facing varying degrees of economic and financial crisis. However, earlier this week oil prices briefly spiked on news that Russia might be willing to negotiate coordinated action. Prices subsequently retreated once expectations subsided.
In nuclear power news, France’s EDF announced yet more delays at its Flamanville reactor, France’s first nuclear reactor in more than 15 years. The reactor was supposed to be completed in 2012 at a cost of 3.3 billion euros. But multiple delays have now pushed the start date back to the end of 2018 at the earliest, with costs ballooning to at least 10.5 billion euros. The delays are a familiar problem with the new generation of nuclear reactors, just as they were with the previous models. To be sure, building nuclear power plants is highly complex, but delays and cost overruns have plagued the industry, and each setback damages the technology’s competitiveness. When France and other industrialized countries were building up their power sectors in the ‘60s, ‘70s, and ‘80s, there were few other alternatives. But, with cheap natural gas and increasingly cheap renewable energy, nuclear power developers can ill afford setbacks.