Prices and production
Oil traded in the vicinity of $82 a barrel on Monday and Tuesday before jumping briefly above $83 and then settling to close at $82.02 on Wednesday. The Wednesday stocks report showed crude inventories increasing by only 1.4 million barrels, well below the 6.5 million barrel increase reported by the API. Larger than expected drops in gasoline and distillate inventories left the total crude and product inventories at their lowest level in a year.

Shrinking gasoline stocks and lower refinery utilization sent wholesale gasoline prices above $2.31 a gallon, the highest it has been since October 2008. Gasoline is clearly leading oil prices higher.

Shell announced that it will no longer sell gasoline to Iran, thus joining Vitol Holding and Glencore International in the embargo. Tehran is dependent on imports for 40 percent of its domestic oil product supply. An Iranian official acknowledged that the rationing program imposed last year has failed to curb domestic oil consumption. So far Asian oil traders seem to be fulfilling Iran’s need for refined products, but efforts are continuing to expand the sanctions.

China continues to stress diplomatic efforts to settle the Iranian nuclear issue and has just signed a deal to set up an oil rig in Iranian waters. Some see Chinese reluctance to pressure Tehran as part of an effort to gain leverage against the US.

The water level at Venezuela’s Guri dam continues dropping towards the day when the country may lose up to half of its remaining electrical generation capacity. Efforts to impose rationing do not seem to be going well and President Chavez has his army running around screwing in compact fluorescent light bulbs. In the meantime, the government is planning to increase its domestic oil consumption by 235,000 b/d in order to squeeze more electricity from existing thermoelectric plants.

China’s Foreign Trade
Beijing announced that its imports and exports increased by some 45 percent year over year in February. Although the numbers are somewhat distorted by a low base in 2009 and the Lunar New Years holiday, they still paint a picture of a rapidly expanding economy and increasing demand for oil. Many economists expressed optimism saying that Chinese exports would increase by 30 percent this year and soon would reach pre-recession levels.

One Chinese economist, however, pointed out that the headline numbers may overstate reality; when adjusted for the number of working days and holidays, exports actually fell by 2.2 percent during the past two months. One report says that Chinese banks cut their lending by 50 percent between January and February. New data on China’s housing market shows that it is still in an inflationary bubble with prices increasing by 10 percent in the past year.

Chinese economic growth still holds the key to oil prices over the next few years. Should Chinese demand for oil continue to increase at 4-5 percent a year, it will not be long before prices start to rise significantly.