Alex Mills: World events conspire to crush Texas oil prices

Crude oil posted prices in Texas dropped below $40 per barrel this month – the first time that’s happened since the recession-fueled slump of 2009, raising fears that the market has not yet bottomed out.

Petroleum economist Karr Ingham noted that “for the first time in the current contraction the daily posted price for West Texas Intermediate crude oil dipped below $40 to $39.75 on Tuesday, August 11.”

Ingham noted that the below-$40 price is the price posted to be paid at the lease level in Texas for West Texas Intermediate and not the futures price for barrels traded on the New York Mercantile Exchange.

“The daily posted price fell to $40 on March 17, 2015, before recovering to $58 on June 10,” Ingham said. “The last time the daily posted WTI price was below $40 was on March 11, 2009.” He noted that the futures price closed at $43.08 on Aug. 12.

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Prices did not rebound during the week. The Web page of the Texas Alliance of Energy Producers showed crude oil prices ranging from a high of $40.58 paid by Shell in West Central Texas to a low of $33.50 paid by Sunoco in South Texas. The Plains Marketing L.P. daily posted price for WTI crude fell even further to $38.75 on Aug. 13.

Ingham said the decision by China to devalue its currency provided much of the impetus for the sharp move downward on Aug. 11, but the price was certain to decline by some measure even without China’s action. The $40 threshold was sure to be broken soon based on highly bearish fundamentals, he said.

Other factors pointing to even further declines:

• Slack demand based on economic stagnation in many areas, including Greece, Russia, Europe and China.

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• Increased production when sanctions are lifted against Iran.

• Continued production by OPEC in excess of its stated quota.

• Continued over-supply of oil in the United States.

This is only the latest blow for oil prices, which have been in a 14-month tailspin.

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The U.S. oil benchmark has now fallen more than 31 percent since topping out this year in early June and is down more than 60 percent since June of last year.

The U.S. Energy Information Administration reported recently that Iran could begin selling as many as 100,000 barrels per day from storage before the end of the year. That came one day after the International Energy Agency said Iraq oil production rose to an all-time record of 4.2 million barrels per day in July, adding to global supplies.

OPEC’s crude oil production last month was the most in more than three years as Iran restored output to the highest level since international sanctions were strengthened in 2012. OPEC, responsible for 40 percent of world oil supplies, raised output by 100,700 barrels per day to 31.5 million barrels per day in July.

The currency devaluation by the world’s second-biggest petroleum consumer could hurt Chinese demand at a time when oil prices are trading near their lowest levels for the year. It suggests that the Chinese economy is still struggling to move out of its slowing pattern – and also suggests that the main oil demand growth engine of the world is not going to come to the rescue of the oversupplied global oil market.

The bottom line, Ingham says: In the absence of a solution to the over-supply problem on the demand side of the equation, the market may well have to force a reduction in production/supply by pushing prices lower.

Alex Mills is president of the Texas Alliance of Energy Producers.