Forget Russian Brawn. Oil Follows America: Liam Denning

Oil-Bust Veterans Brace For Storm Unseen By Shale-Boom Neophytes

Oil production outside of Midland, Texas.

Photographer: Brittany Sowacke/Bloomberg

So it turns out the humble American laborer is more powerful than the Russian air force. Who knew?

With U.S. crude-oil prices having fallen by about half in the past year but trading in a narrow band of roughly $40 to $50 for the past two months, bulls sense a potential turning point. Storied commodities investor Jim Rogers hinted strongly at it in an interview today, Bloomberg news reported, without quite committing. And indeed, overnight in New York, the WTI contract added a buck a barrel, as this chart shows.

Syria drove it higher, jobs drove it lower
Syria drove it higher, jobs drove it lower

One justification for the jump is the start of Russian air strikes in Syria. The thinking goes that, with so many different countries, including the U.S., muscling into the same sandpit, there’s a higher risk of an inadvertent confrontation.

The logic there can’t be faulted. But it is a thin reed on which to build a sustained rally in oil prices. Geopolitical upheaval, from the chaos of the 1970s right through the Iraq War, can stoke fears of supply shortages. But Syria’s oil output is close to nil already. Unless a wider war were to break out right across the Middle East, maybe sucking in the two former Cold War adversaries, this crisis isn’t the spark for a rally.

Ironically, even as Russia’s military was supposedly doing its bit to raise oil prices, new numbers came out showing that the motherland’s producers back home were still working in the opposite direction: Russian oil output hit a post-Soviet record high in September.

There are real political risks that could take barrels off the market, in part because low oil prices may pull the rug from under tottering oil-exporting economies such as Venezuela’s. Equally, though, some geopolitical developments are heading the other way for oil, Iran’s potential return to markets being the obvious example.

And never mind these intangibles. As the chart shows, a surprisingly weak set of jobs numbers on Friday morning soon provided a reality check to the oil market’s armchair generals. U.S. oil consumption though July of this year was 2.7 percent higher than consumption in the first seven months of 2014, a bright spot in an otherwise gloomy 2015. A shaky job market could change that.

Moreover, despite continuing layoffs in the shale fields, U.S. oil output through July was 11.5 percent higher than output in the first seven months of 2014, a report this week from the Energy Information Administration showed. 

If the Cold War taught us anything, productivity usually wins out against sheer brute force.

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