1. Prices and production
Oil trading early in the week was dominated by the stock market, with the Dow dropping 3.4 percent on Monday and then rebounding by 3.2 percent on Tuesday. Surprises in the weekly stocks report on Wednesday sent oil prices up six percent to close above $42 a barrel. The biggest surprise was that the demand for gasoline in the last four weeks is now 1.7 percent above last year. This increase, combined with lower imports, resulted in a 3.4 million barrel drop in gasoline inventories. The crude inventory was up by 700,000 barrels last week, well below the multimillion barrel increases we have seen in recent weeks.
Crude imports during the last four weeks are down by 13 percent year over year, suggesting that the OPEC production cuts may be taking hold. Tanker tracker Petrologistics reported on Monday it expects OPEC production in February will be down by 4.3 million b/d from September production. If this report is true, OPEC will be very close to its announced quotas. Another report notes that Asia is already feeling the impact of reduced shipments from the Gulf and that the impact will be felt in Europe and the US in the next few weeks.
Officials from Algeria, Venezuela, and Iran continue to call for another production cut at the March 15th OPEC meeting. Iran says it has produced 550,000 b/d less crude for the last two months. Storage of oil aboard tankers, while awaiting higher prices, is now said to have increased to 80 million barrels giving more ammunition to those arguing for another production cut.
2. The Automakers
This could be a decisive week for the US auto industry as top executives meet with President Obama’s auto team on Thursday. The executives are seeking continued federal support as they attempt to downsize. Some analysts are saying that this support could easily top $100 billion over the next few years, considering that the parts manufacturers and dealers will likely require federal loans to keep the industry functioning. Early indications suggest that new car sales in February will be considerably lower than during January. The new administration clearly has one of the toughest decisions in US industrial history to make over the next few weeks. Even if the decision is to let the companies enter bankruptcy, it will likely cost the government on the order of $30 billion to support an orderly reorganization.