Friday is the one-year anniversary of crude oil’s record close of $145 a barrel. But commodity traders were in no mood for a party.
Oil prices dropped more than $2 a barrel to below $67 in trading in New York Thursday, beaten down by dismal economic news and word that the Organization of Petroleum Exporting Countries discipline is shaky.
First news out of the U.S., the world’s largest consumer of crude oil: the unemployment rate is up to 9.5%, the highest since Ronald Reagan’s first term in office; and the federal government reported payrolls tumbled. Our Dow Jones Newswires colleague noted there were “widespread declines across manufacturing, construction and professional services, a grim reminder that the path to economic recovery will be bumpy.” (Sub. req’d.) The jobless rate in the Eurozone is also at 9.5%, a 10-year high. More unemployment means more insecurity, less spending and less fossil-fuel consumption.
But this might not even be the worst news for oil bulls. Months of big OPEC production cuts have been a primary factor for the sweeping recovery in crude prices. But that hardnosed disciplined is wavering as a steady stream of increased production from some of the cartel’s members quietly enters the market.
A Dow Jones Newswires’ survey Thursday shows output from OPEC’s 11 quota-bound members rose a third straight month in June. Led by Iran and Venezuela, output was up almost 300,000 barrels a day, or 1%, compared with March.
OPEC compliance with a trio of large output reductions announced late last year is now at 76%, down seven percentage points, since March, according to the survey. Some other industry reports though have OPEC compliance near just 70%.
“Creeping OPEC production serves to underscore the underlying weakness (of the market) and that (prices) likely got ahead of themselves,” says PFC Energy analyst David Kirsch.
Moody’s, the credit rating agency, says Thursday its forecast for the global integrated oil industry is “negative” as it expects economic recovery in 2010 to be “slow and painful, crimping worldwide demand for oil and natural gas at a time when inventories are near record highs.”
Of course, it bears repeating that weakness in crude-oil markets doesn’t mean strength for renewable sources of energy. Biofuels as well as wind and solar still need energy prices to be high to help them claw their way to profitability. A collapse in oil prices will be bad news for boosters of carbon-lite fuel.