Over the last few weeks there have been three significant developments affecting crude (USO). Two negative for prices, one positive. This article will cover those developments.
The positive - Fed still hell-bent on creating giant bubbles
This is perhaps the main effect still allowing crude to trade over $100 per barrel. Bernanke's Federal Reserve has decided to use asset markets as a tool to bring about economic expansion, and in doing such he inflates every asset, commodities included.
This was made even clearer as the Fed refused to begin tapering its $85 billion per month asset buying program. The Fed is buying the equivalent of 2.83 million $30,000 cars per month. Indeed, it's buying per day the equivalent of 472 times what Tesla sells per day. This is mind-boggling, and has a huge effect.
Although crude is somewhat removed from the most affected markets (bonds and stocks), it still feels a positive pull, mostly from investors trying to hedge themselves from possibly inflationary effects. As much can be seen in the speculative positioning in crude futures, where long speculators continue to be near historic highs (Source: Barcharts.com).
The first negative - Libya coming back online
Ever since July, Libya has been besieged by strikes which have taken its crude production down from 1.4 million bpd to just 0.15 million bpd. While Saudi Arabia and Iraq, as well as the U.S., stepped in to fill the production void, this was still more than 1 million bpd removed from the market.
In practical matters, it was obviously more important than either Egypt or Syria. Syria was always some kind of red herring. The whole thesis was that if Syria was attacked, then it could strike back somewhere where there was, indeed, crude production (since there's nearly none of that in Syria itself). This made no sense from the start, just recently Israel struck targets inside Syria, much like the U.S. was bound to do, with no retaliation whatsoever. It's not in Syria government's interest to retaliate, as that would just mean it would face a more powerful enemy than the internal opposition it already faces.
This dynamic started changing in the present week. Libya has announced an increase in production from 0.15 million bpd to 0.4 million bpd and expects production to reach 0.6 billion bpd shortly. Normalization seems on the table, which was to be expected when the country relies on crude for 75% of its budget revenues.
The second negative - U.S. production continues to explode and is even accelerating
Libya is not the only positive for production and hence negative for crude prices. The share revolution in the U.S. is still going strong. Indeed, if we compare production year-on-year, it's actually increasing faster and faster. From increases of around 1.2 million bpd early in 2013, production is not pushing increases of over 1.5 million bpd, with a couple of weeks even going over 2 million bpd due to a lower comparison basis in 2012 (Source for data: EIA).
Even more surprising, from the end of June 2013 when the Libyan problems began to the September 13 week, production has increased by a full 0.56 million bpd per week.
This means that over the last year the U.S. has added about one Libya at full production. And seems likely to continue even at an accelerated pace. This is bound to create an oversupplied market in the short-term.
After having sustained several unplanned production shutdowns, the crude market is once again seeing Libya's output returning. At the same time, the U.S. production continues to increase massively and indeed is accelerating in that process. These, together with massive long speculative positioning, are conductive to lower crude prices.
The only "but" remains the actions of the Federal Reserve, whose monetary madness constitutes a positive effect for any and all assets (except the USD). Crude is also positively affected, though not as directly as bonds or stocks. In spite of this, I believe that the fundamentals warrant lower crude prices.