1. Prices and production
Oil began trading on Tuesday at close to $38 a barrel, but then fell to $35 in sympathy with the Dow-Jones which dropped nearly 300 points. Wednesday saw a 39 cent drop. Concerns are increasing that problems with storage capacity at Cushing, Okla., where NY Mercantile Exchange deliveries are made, could force prices closer to $30 a barrel on Friday when the March futures contract expires. Analysts are expecting another large increase in the US crude inventory when the stocks report is released on Thursday.
As crude prices continue to slip OPEC officials continue to talk about the need for further production cuts at the March 15th meeting. Some analysts are suggesting that the Saudis may not be able to cut production much further as they need the natural gas that is produced along with the oil to generate electricity for air conditioning during the hot summer months.
Russian oil production in January was down 0.8 percent year on year and natural gas production was down 10.5 percent. Moscow is studying the feasibility of establishing a strategic petroleum reserve that would buy crude from Russian producers when prices are low to stabilize the market. China has agreed to loan Russia $25 billion. The loan is said to run for 20 years and will be repaid with oil at $20 a barrel.
Shell and Chevron announced that they will be cutting production and pulling employees out of the Niger Delta due to the deteriorating security situation. Over 300 oil workers have been kidnapped in the last three years.
2. A supply crunch?
The Executive Director of the IEA said on Monday that there could be an oil supply crunch whenever global demand recovers and the impact of lower investment is felt on oil supplies. The IEA is forecasting that economic recovery will begin in 2010 and that demand for oil could increase by as much as 1 million b/d next year. The Agency continues to warn against further production cuts by OPEC that will only exacerbate the situation when the recovery begins.