Prices and production
So far oil has had a volatile week, falling to $40 a barrel on Monday and then rebounding to close above $45 on Wednesday – a five week high. Most of the decline and bounce were precipitated by movements in the equity markets and the perceived outlook for the world economy. Beijing’s announcement of its own $500 billion stimulus package on Wednesday was the chief reason for Wednesday’s increase.
A drop in US crude inventories last week added impetus to the price rise. Analysts had been expecting a 1 million barrel increase in contrast to the reported 800,000 barrel drop. Refinery utilization was up 1.8 percent last week resulting in increases in gasoline in distillate stocks. While overall US oil consumption was still down by 1.3 percent over last year, gasoline consumption was reported to be up by 2.2 percent over last year.
The glut of oil stored at Cushing, OK is starting to ease which in turn is closing the gap between WTI which is traded in New York and Brent which is traded in London. The gap is now only 59 cents a barrel, the lowest since January 2nd.
More surveys are reporting that OPEC’s output fell by about 800,000 b/d or 2.7 percent in February. Saudi output is said to have fallen below 8 million b/d, the lowest since 2002. If these numbers are confirmed, it means that OPEC has made over 80 percent of its announced cutback, which many are hailing as an unprecedented achievement. Iran, Libya, and Angola are reported as being the most over quota.
There seems to have been a change in tone with regards to the possibility of a further production cut at the March 15th OPEC meeting. Last week with oil prices in the high $30s there was much discussion of another cut in production. This week with more confirmation that the cuts are taking hold and signs that prices may be starting to rise, even the usually hawkish Iranians are talking about holding off while awaiting developments. Iran’s Oil Minster noted that an additional 500,000 – 600,000 b/d of cuts are still to be made and if these are completed prices should start to rise.
In Nigeria a major Shell oil export pipeline is reported to have been cut in several places. This time the attackers are said to be oil thieves who are retaliating for the government’s seizure of barges used to make off with stolen oil.
The situation in Venezuela is deteriorating. Government forces occupied the nation’s rice mills in an effort to force increases in production and hold down prices. PDVSA, the state oil company is asking all its contractors, some of which who have not been paid in months, to accept a 40 percent reduction in the prices charged for their services. As there is no indication that the costs of providing these services has fallen this much in recent months, the government is facing some long and hard negotiations and possibly disruptions in drilling activity.