Prices and production

Crude closed on Wednesday at $62.05 a barrel, the highest level in more than six months, after rising $5 in the last three days. Although the US crude inventory dropped by 2.1 million barrels and the Nigerian militants are talking about blocking exports, most of the increase still appears to be related to financial markets. US demand for oil products over the last four weeks is down 7.6 percent over last year and refinery utilization last week was at a relatively low 81.8 percent. While gasoline demand is only down by 1.2 percent year over year, distillate consumption is down 12 percent, reflecting the decline in demand for transportation.

Despite more bad economic news, investor optimism that the economic situation is easing continues to contribute to rising oil prices. The US dollar continues to decline and on Wednesday reached its lowest level against the Euro since early January. A falling dollar, which triggers a flight to oil as a hedge, is likely a major reason for the rapid price rise this week.

Crude prices have now surged by more than 70 percent since the February low of around $34 a barrel. Given that global economic conditions and the demand for oil have steadily deteriorated during the last three months, many are surprised by this sudden move. Opinions are split with some seeing oil rising to $70, while others believe the rally is overdone and is not supported by fundamentals.

With oil prices surging, no one expects a further cut in OPEC production at next week’s meeting. Some worry that the increasing fighting in Nigeria could lead to a further reduction in exports which are now at 1.6 million b/d after having been as low as 1.2 million b/d in April.

Brazil turns to China

The global financial crisis and low oil prices have forced yet another country to Beijing for help in developing its oil resources. Petrobras, Brazil’s state oil company, needs to invest some $174 billion over the next five years to develop its newly discovered deepwater deposits. In return for a $10 billion loan, Brazil will send China 150,000 b/d of oil starting this year and this will increase to 200,000 b/d between 2010 and 2019.

In recent months, China has loaned Russia $25 billion in return for 300,000 b/d for the next 20 years and already is receiving about 200,000 b/d from Venezuela in return for a $4 billion loan. President Chavez is talking about increasing the sales to China to 1 million b/d in the next few years and Beijing is already building refineries to process the heavy Venezuelan oil.

Obama administration accord pushes MPG

Tuesday the administration announced a deal to accelerate improvements in US new-car fleet mileage requirements. The deadline moves up from 35 miles per gallon by 2020 to 35.5 mpg by 2016. In a break from years of acrimonious debate, the auto industry players and environmental groups both supported the accord.