Shadow on Oil Price Rebound

Shadow on Oil Price ReboundShadow on Oil Price Rebound

Despite the protracted downward slide, 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," Evan Kelly wrote for OilPrice.

Oil prices rose on the news. The markets, however, are waiting on a much more significant announcement from the US 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.

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 on stream, 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.

The US Energy Information Association released a report this week that showed that there would be little effect on gasoline prices if the US 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. 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.

  Wishful Thinking

Also this week, Russian President Vladimir Putin met Venezuelan President Nicolas Maduro in China, and the two apparently discussed ways to stabilize oil prices.

Maduro said they agreed on “initiatives” to address low oil prices, but did not elaborate. In all likelihood, Maduro is engaging in a degree of 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 Europe, 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. 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.

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.