Despite turmoil, oil prices falling

Crude ample on U.S. output

Fighting across Iraq, Libya, Ukraine and Gaza and demand from a growing U.S. economy should mean higher oil prices, analysts say. Yet crude prices have been falling recently.

Six years ago, oil soared to a record $147 a barrel as tension mounted over Iran's nuclear program, and the world economy had just seen the strongest period of sustained growth since the 1970s. Now, West Texas Intermediate crude, the U.S. benchmark price, is trading below $100 a barrel, and Brent crude, the European equivalent, recently tumbled to a 13-month low.

What's changed is the shale fracking boom.

The U.S. is pumping the most oil in 27 years, adding more than 3 million barrels of daily supply since 2008. The International Energy Agency said Tuesday that the supply glut is shielding the market from disruptions. Analysts at Bank of America Corp., Citigroup Inc. and BNP Paribas SA concur.

"North America has pushed out an incredible amount of crude oil that it used to import," said Ed Morse, the head of commodities research at Citigroup. "The world doesn't need that much."

Hydraulic fracturing, or fracking, is a drilling technique that uses pressurized water, sand and chemicals to free natural gas or oil trapped in rock formations. Fracking has allowed drillers to revisit oil fields where production had slowed and has given them access to oil that had been unreachable.

Most of the companies drilling for natural gas in Arkansas' Fayetteville shale have shifted their efforts to more lucrative shale oil areas in other states. Drilling rigs in Arkansas have dropped from more than 60 in 2008 to nine, according to oil-field services company Baker Hughes.

The U.S. imported 7.17 million barrels of crude oil a day in May, a 26 percent drop from the same month in 2008, according to data compiled by the Energy Information Administration, the Energy Department's statistical arm. Foreign deliveries will meet 22 percent of U.S. demand next year, the lowest level since 1970, the agency said.

The nation's oil output is forecast to climb to 9.28 million barrels a day next year, the highest level since 1972, the agency said. At the same time, the U.S. economy is expected to continue to expand this year after growing at a 4 percent annualized rate in the second quarter.

The rise in domestic drilling has been a boon for the nation's oil companies, including Arkansas-based Murphy Oil Corp. Murphy's main area for onshore drilling in the United States is the Eagle Ford shale in south Texas. Murphy operates eight drilling rigs in the shale formation and said it expects to drill 200 wells this year.

During the oil company's earnings conference call last month, Murphy Oil President and Chief Executive Officer Roger Jenkins said crude from the Eagle Ford was priced at just under $96 a barrel in the second quarter. Murphy said its Eagle Ford wells produced an average of 52,814 barrels of oil equivalent per day in the quarter, an increase from 49,634 barrels per day in the first quarter.

"We have a large resource in the Eagle Ford shale," Jenkins said during the call. "We see the total resource now at just over 700 million barrels net."

Oil markets became more resistant to the threat of global supply disruptions because of "spare capacity" and softer global demand, said Francisco Blanch, the head of commodities research at Bank of America in New York. Oil markets that are the most stable since the early 1970s, the bank said in a report Wednesday.

"Growth in oil demand was far outpacing our ability to physically supply oil" in the first half of 2008, said Harry Tchilinguirian, the head of commodity markets strategy at BNP Paribas in London. "The price of oil needed to rise promptly to ration demand."

The 2008 price rally was supported by investors pouring money into oil futures as they sought alternatives to stocks. Today, speculative interest in crude is shrinking, Tchilinguirian said.

"There was a bubble in the market in 2008," with the view that the world was running out of oil and other commodities, Morse said. "Everything changed soon after 2009."

Brent crude for September delivery rose $1.26 to close Wednesday at $104.28 a barrel on the London-based ICE Futures Europe exchange. The contract touched $102.37, the lowest intraday level since July 1, 2013. West Texas crude for September delivery rose 22 cents to settle at $97.59 a barrel on the New York Mercantile Exchange.

Violence flared in Iraq, the second-largest producer in the Organization of Petroleum Exporting Countries, in early June as Sunni Islamist militants captured towns in the northwest and then pushed toward Baghdad. Clashes between political factions intensified last month in Libya, where oil exports have been choked by political protests.

Israel deployed forces in Gaza last month with the stated aims of quashing rocket fire and destroying dozens of infiltration tunnels. Tension between Russia and Western governments has escalated over President Vladimir Putin's backing of separatist rebels in eastern Ukraine.

Despite the turmoil, the average retail gasoline price in the U.S. has dropped 22.3 cents a gallon since peaking in April at just under $3.70, data compiled by Heathrow, Fla.-based AAA show. In Arkansas, the average price of a gallon of gasoline on Wednesday was $3.27, down about 14 cents from a month ago.

Prices nationally are at a four-year seasonal low and capped the biggest July drop in six years as the nation's refiners ran the most oil on record to take advantage of cheap domestic supplies.

The recent decline in oil prices may prove to be just a phase as global demand is forecast to pick up in the second half of the year, said Bhushan Bahree, senior director of global oil at IHS Energy. Demand will rise 1.71 million barrels a day to 93.45 million in the third quarter and climb again to 94.04 million in the fourth, the Paris-based International Energy Agency said in a report Tuesday.

"There are different moving parts when you go forward, and what we're expecting now may not play out the same way," Bahree said from Washington. "I would still think we are going to see more demand and there will be some support for prices."

U.S. oil production is outpacing unplanned failures that cut into global supply, said Adam Sieminski, head of the Energy Information Administration. Global failures affected about 3.2 million barrels a day in July, up from 1.5 million at the end of 2011, he said. U.S. output has meanwhile risen 2.61 million barrels a day since the end of 2011.

"Production is continuing to grow, and in the meantime, global demand is slowing down a little bit and efficiency gains are beginning to have an impact," Sieminski said. "It's a very positive story for consumers."

Information for this article was contributed by Lynn Doan, Grant Smith, Moming Zhou, Mark Shenk and Lorraine Woellert of Bloomberg News and by Jessica Seaman of the Arkansas Democrat-Gazette.

A Section on 08/14/2014

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