June 2010 Monthly Average Crude Oil Price: Higher Despite Current Fundamentals

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The monthly average price of West Texas Intermediate crude oil ticked higher in June, to $75.35 per barrel – an increase of $1.51 (2.0 percent). That price increase occurred despite a stronger dollar, the lagged impacts of a slight setback in consumption of roughly 0.2 million barrels per day (BPD) in April, and crude stocks that are well above the average five-year range.

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The Deepwater Horizon oil leak dominated energy-related news during the past month. The extent and impacts of the leak have been difficult to quantify, but reports from the research vessel Thomas Jefferson estimated the amount of oil leaking into the Gulf of Mexico at 120,000 BPD; also, the oil “lake” underneath the surface of the water could be covering up to 40 percent of the entire Gulf. The National Oceanographic and Atmospheric Administration predicts that tar balls will likely reach the Florida Keys and Miami in the months ahead.

A legal tug-of-war erupted after 27 May, when the Obama administration imposed a six-month moratorium on offshore drilling in water deeper than 500 feet. The administration claimed to have based its moratorium on the recommendations of seven experts, but had to backtrack when the panel members wrote a letter criticizing the moratorium and revealing that the version of the Interior Department report they were asked to review had not mentioned a drilling ban. A federal judge in Louisiana issued a preliminary restraining order against the ban, but the White House kept the moratorium in place by immediately appealing the judge’s ruling.

The Interior Department has said shallow-water drilling is unaffected by the ban, but area operators counter that the Department has imposed a “stealth” moratorium on virtually all operations by holding up permits. The Bureau of Ocean Energy Management, Regulation and Enforcement (formerly known as the Minerals Management Service), issued 11 permits for rigs in waters less than 500 feet from June 8 through June 30, when the first of two new safety rules was released. The government normally issues about 10 to 15 permits a week, said Randall Stilley, chief executive officer for Seahawk Drilling Inc. "We've got a long way to go before we get back to that level," said Stilley, whose Houston-based company provides so- called jack-up rigs supported by legs that extend to the seafloor. "It is so slow. We're having to shut down rigs, and that's a bad situation for everybody."

Although the BP oil spill and moratorium may wreak lasting havoc on local communities, the United States’ energy budget and GDP are likely to suffer only a mild impact. Wells Fargo economist Mark Vitner expects up to 250,000 Gulf jobs in fishing, tourism and energy will be lost in 2H2010. However, Vitner estimates those job losses will lower 3Q2010 GDP growth by only 0.2 percentage point; he envisions little or no effect on growth in 4Q2010, assuming the leak is plugged by then.