1. Prices continue to slip
Oil prices continue to fall this week as US commercial inventories increased by 8 million barrels, the flow of bad economic news continued, and OPEC production cuts failed to keep up with the apparent fall in demand. Oil inventories at Cushing, Okla. ended last week at a record 33 million barrels as refineries ran at only 85 percent of capacity. The tight storage situation in the US has oil for February delivery selling at an unprecedented $7 a barrel discount to March oil. The front month price which was trading above $50 a barrel last week closed Wednesday at $37.28.
Demand for gasoline in the US may be creeping back up. The EIA reports that the four-week demand for gasoline, which was 2.7 percent below the prior year in December, now is now only 2.1 percent lower. The MasterCard survey, however, has US demand for gasoline dropping in the last month. US gasoline prices have started to move higher and now about 10 cents a gallon higher than in December. We’re concerned that the quality of oil consumption and production data has had trouble keeping up with the seismic shifts in economic and financial markets.
There has been little change in the Gaza situation affecting the oil markets. The Saudis reiterated earlier this week that oil will not be used as a weapon in the conflict despite renewed calls for an embargo from hardliners in Iran. The flow of natural gas to Europe through the Ukraine remains closed, but so far this does not appear to have significantly affected the demand for oil. In Nigeria, the Federal government has stopped sharing oil revenues with state governments because of the low prices.
The increase in China’s crude imports during 2008, while somewhat smaller than in 2006 and 2007, was an impressive 9.6 percent. Imports in December increased by 12 percent as compared to a year earlier as China purchased crude to fill its new strategic reserve. For now at least, the drop in demand for oil does not seem to have extended to China.
2. OPEC keeps trying
The Saudis are continuing to take the lead in efforts to cut OPEC’s production still further. Oil Minister al-Naimi told reporters that Saudi production is currently 8 million b/d and that February production will be lower than the Kingdom’s official target. Other sources say the Saudis will produce 7.7 million b/d next month. Iran and Venezuela reiterated this week that there could be further production cuts at the March OPEC meeting unless prices begin to rise. President Chavez said that OPEC would be willing to cut another production by another 2 to 4 million b/d if that it what it takes to force up prices.
In the meantime, the IEA has begun to express concern that all these production cuts will eventually force prices so high that the ailing global economy will be seriously damaged.