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Crude oil faces Headwinds in 2014

David Becker
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Crude oil faces diverging forces

Crude oil prices have been edging higher despite a rising dollar and a back-up in longer term treasury yields. With inflation expectations muted and high production in the United States, headwinds loom for crude oil which could push prices lower in the New Year.

The overall dovish tone of the Fed meeting last week was followed by a few economic indicators that showed that the US economy is still only growing modestly. Slower growth will likely generate headwinds for crude prices, as stockpiles in the US are at their highest in the past 5-years.

Existing home sales fell 4.3 percent to an annual rate of 4.90 million, according to the National Association of Realtors. That was the weakest pace since December 2012 and the first time since April that the pace has slipped below 5 million. Mortgage rates are nearly a full percentage point higher than in the spring, when they were near record lows.

On the employment front, Jobless claims climbed by 10,000 to 379,000 in the period ended December, 14 2013 the most since the end of March, according to the Labor Department. The median forecast of 48 economists surveyed called for a decrease to 336,000.

Crude Oil Production

According to the Department of Energy, in its Annual Energy Outlook for 2014, US crude oil production is expected to approach the historical high achieved in 1970 of 9.6 million barrels per day through 2016. The record output is a function of horizontal drilling which is allowing producers to extract oil previously unattainable. Demand in the US for gasoline has edged lower, and the bulk of the demand comes from distillates. The laws in the US forbid producers from exporting oil, only gasoline and distillates (diesel or heating oil), and therefore stockpiles of crude oil continues to grow. Higher growth will eventually take its toll on prices, driving them back down toward $90 per barrel.

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