Prices and production

For a change, it was the fundamentals of oil that drove the equity markets rather than the other way around. Oil prices had been falling earlier this week on bad economic news. The mood changed on Wednesday when the EIA announced that US crude oil stocks fell last week by 8.4 million barrels rather than increasing by 1.5 million as analysts had expected.

US refinery utilization was only up by 0.5 percent and consumption remained about the same, leaving lower imports, which dropped by 1.4 million b/d, as the primary cause of the inventory decline. Crude imports last week were the lowest since the September hurricane disruptions. There was no obvious reason for the drop in imports, other than European Brent crude selling for more than NYMEX prices may have attracted more oil to Europe. It is also possible that US refineries simply are buying less crude because of large inventories and weak demand. The drop in imports may even be caused by anomalies in shipping schedules which will be straightened out in coming weeks.

The surge increased oil prices by $3.23 to settle at $72.42 on Wednesday, after having been as low as $65 on Monday. Earlier in the week, crude was falling on lower consumer confidence in the US and a major drop in China’s equity markets which have now fallen nearly 20 percent since August 4th.

The situation in Iraq continues to deteriorate with a bombing in Baghdad yesterday killing 95 and wounding more than 400. There was also a report that the US is repositioning troops further north to dampen tensions between the Iraqis and the Kurds.

The burst feed pipe at Russia’s largest hydroelectric station killed over 80 workers and destroyed the generators. The damage will take years to repair.

Is China’s economy stalling?

During the last six months the apparent success of Beijing’s domestic stimulus package has led many to opine that a strong Chinese economy will lead the world out of the recession. As we approach the third quarter, however, the situation is not looking as good. Government expenditures of stimulus money are starting to decline and bank loans in July were down by nearly 75 percent as compared with June. Some senior Chinese officials are now saying that that China risks a second contraction with deflation, a bursting of the stock market and housing bubbles that have been evident in recent months.

One observer noted that the government stimulus kept production running at levels not justified by demand and pointed out that China’s steel industry now has a capacity of 670 million tons while actual demand is running only 400-500 million tons. He also notes that China has become so tied to the world economy that Beijing can no longer control its own destiny.

Correction: in an ASPO-USA release on August 18th, imports for the month of May were incorrectly cited. The actual number of US oil imports was 354 million barrels, not 2.23 billion. We regret the error.