Oil prices are out of whack. The futures price of crude oil expired lower than the physical cash market as the futures are being delivered in to a historically oversupplied market. The ugly February market expiration left a gap around $1.70 a barrel compared with the now front month March contract. The oil market fear about the outlook for global growth is offsetting the high probability that U.S. production will soon crater and the impact of almost 400 billion dollars in energy projects that have been taken off of the board. If you fear that last year’s exceptional increase in global demand can’t be repeated in this new year, then the fear that the glut will only get larger will dominate your mood.
The American Petroleum Institute showed once again that U.S. oil supplies are continuing to add to record product supply as crude increased, up by 4.6 million barrels. Gas supplies are up 4.7 million barrel. Distillates are up 1.5 million barrels. The one supportive part of the report was supply in the all-important Cushing, Oklahoma delivery point that saw supplies rise by a less than expected 100,000 barrels.
On top of that Reuters is reporting that Iraq is planning on raising production by 400,000 barrels per day. They are also looking at a demand drop in the middle east as low oil prices take a toll on their economies.
Fear is still the driving force in this market with the focus on uncertainty in China and U.S. markets selling off hard is rising questions on whether or not the Fed made the right decision to raise interest rates. Not only did we see the Fed raise rates but the market is getting prepared for a slew of tax increases that went into effect due to the "Affordable Care Act”. Why are we not spending that extra money at the pump? It is because our health-care costs are going up, our taxes are going up and we are making a lot less money than we were before.
The recent rout in oil prices will zap more confidence from U.S. banks that support oil. More bankruptcies are the fear and we have the expectations that we will see a much sharper drop in U.S. production that the market hopes will be made up by Iran.
The New York Times is reporting, “A high-profile British inquiry into the poisoning of Alexander V. Litvinenko, a former K.G.B. officer and foe of the Kremlin, concluded on Thursday that his murder “was probably approved” by the head of Russia’s spy service and President Vladimir V. Putin was the finding by Robert Owen, a retired judge, in a 328-page report represented by far the most damning official link between Mr. Litvinenko’s death on Nov. 23, 2006, and the highest levels of the Kremlin."
Putin was also suspected in the poisoning of Ukrainian presidential candidate Viktor Yushchenko in 2004. The dioxin that poisoned him was so pure that it was definitely made in a laboratory that had to be supported by a major government. Yushchenko led the Orange Revolution to seek independence from Russian influence in their domestic affairs.
Just a side note: the Russian ruble hit a record low against the dollar. Low oil prices are bringing the Russian economy to their knees.