Crude Oil Prices and the Government Shutdown

Brian Hicks

Written By Brian Hicks

Posted October 1, 2013

It’s a pretty sad day for Americans, as Congress failed to reach an agreement on a short-term funding measure, forcing the shutdown of the federal government for the first time in 17 years.

It’s really no surprise. It’s been apparent for days that Congress was far from a decision, and it proved our growing fears correct. These two sides can’t agree on anything. Period.

crude oilCrude oil prices are always a telltale sign. Brent crude oil fell on Monday and suffered its first monthly decline since May as the shutdown was looming. West Texas Intermediate (WTI) followed right behind.

Hopes of a last minute deal were dashed as the clock struck twelve last night, and today, with a brand new quarter upon us, we have no operating government to speak of and countless federal employees out of work.

U.S. equities and the U.S. dollar also fell, while energy shares posted the steepest losses of the ten S&P 500 sectors.

Crude oil prices are a clear indicator of our environment, and as we sit here – many of us not working – prices are still sinking low as the market bends to these latest developments. Brent has lost more than 50 cents a barrel and dropped more than five percent for September.

WTI is on the same track at just under $102 this morning.

How and Why

Even though we knew the shutdown was likely, it’s still next to impossible to prepare for it. But the price of oil has actually been at a decline for three straight weeks after Brent climbed to more than $110 at the end of August.

We can place some of that blame – or even a lot of it – on our own government, but there are other facts to consider.

Italy has political uncertainty; diplomatic efforts are being made with Syria; Iran is still troubling the world with its uranium stockpiles; and then there’s China, which showed lower than expected manufacturing growth.

These are all factors that would contribute to a struggle in the crude oil market. Although our own government should still be shamed, the price of crude oil – especially Brent – reflects the actions of us all.

In the next few days, realistically, Brent oil will probably move towards $105 a barrel and WTI to $100.

Italy can’t seem to rectify its political turmoil. A group of senators headed by Silvio Berlusconi and the center-right party threatened to form a new group and secede under present conditions.

Last Friday, President Barack Obama made first contact with new Iranian President Hassan Rouhani by telephone, the first such conversation the two nations have had in three whole decades. It was a 15 minute phone conversation where both sides expressed their desire to seek a deal over Iran’s nuclear program.

Iran has faced dwindling exports in recent years as countries have banded together to form tight sanctions against them. Even Iran’s top four crude buyers, according to Reuters – China, India, Japan and South Korea – cut crude purchases by 16 percent in the first eight months of 2013.

And as a surprise to us all, China’s manufacturing sector expanded less in September than was estimated.

Meanwhile, Syria pushed oil to a two-year high as the possibility of a U.S.-led attack threatened to escalate the Syrian conflict and disrupt Middle East supplies. Syria is right next to Iraq, the second-biggest OPEC producer.

The Middle East accounted for roughly 35 percent of the global oil output in the first quarter of 2013, according to Bloomberg.

Where Oil Prices are Headed

Now, we can look at all this and gripe and grumble, but at the end of the day, crude oil prices still posted a 5.4 percent gain for the quarter.

Things have generally been looking up, even though prices are down about 5.5 percent for this month.

And as for starting a new fiscal quarter off with a bang – well, that’s just not going to happen. It’s going to be slow going until we can get our government back to work.

We can’t forget that even when we do send our government employees back to work, there is still the dispute over raising the $16.7 trillion debt ceiling.

It’s inevitable that the economy is going to slow down, but that doesn’t mean we have to shake it up.

Should we be a little nervous? Yes. Should we be optimistic? I say yes. We can’t forget the progress that we’ve made, and we can’t lose confidence in our market.

The demand for crude is going to suffer; therefore, so too will the price. But we’re not going to get rattled – not this time.


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