Developments this week
Oil prices have moved up steadily this week settling at $90.48 a barrel on Wednesday. Although US crude inventories have dropped by nearly 20 million barrels since late November, some industry analysts insist that this December drop is perfectly normal as refiners delay imports to avoid having to pay taxes on excessive year-end inventories. They say US crude inventories will rebound in January. Other analysts, however, see the drawdown in crude as well beyond normal despite the fact that inventories started declining from 27-year highs in September.

A settlement over $90 barrel is seen by many as a sign of higher prices ahead. Chartists already are talking about the “Fibonnaci” retracement from the 2008 peak of $147 a barrel to the low of $32. The chartists’ theory says that if oil should settle above $103 a barrel then we have entered a new primary uptrend. Nearly all of the major Wall Street firms are talking about higher prices in the year ahead. Earlier this week Bank of America told its clients that oil may go to $118-120 a barrel in 2011.

The weekly stocks report showed a 6 million barrel decline in total commercial inventories last week and a 4 percent increase in demand during the last four weeks over 2009. Cold weather and an improving US economy are cited by most wire services as the impetus for the recent price increases, although some say that continuing demand for crude and diesel from China may be a contributing factor. Gasoline futures in NY have increased by 12 cents in the last three days, while reports show US demand in recent weeks is up nearly two percent over last year.

Wall Street analysts continue to talk of a slowdown in China’s demand for oil next year. A recent survey has Beijing consumption increasing by a modest 6.3 percent in 2011 down from the torrid 20 percent jump in 2010. The conventional wisdom is that Beijing’s efforts to slow inflation through a tightened money supply will lead to increased interest rates and a lower demand for oil. Price increases decreed by Beijing this week will also temper demand.

In the meantime, however, there is still no sign that demand is abating to the extent posited by the Wall Street economists. So far China has seen unusually cold and snowy weather in December. Coal stocks in central and northern China are dropping rapidly at many power stations and supply is not forecast to keep up with the increased demand in the next few months. In some areas coal suppliers with long-term fixed price contracts are holding back on shipments. Blackouts and power rationing seem likely to spread.

It is now widely reported that China’s apparent demand for oil increased by 15 percent, year over year, in November to a new all-time high of 9.3 million b/d in December and natural gas consumption increased by 13 percent. Given the inability of the domestic coal industry and coal transport systems to keep up with demand, it seems likely that higher than expected demand for oil will continue to at least through the winter to offset faltering coal supplies.
Some analysts are already saying that global demand for oil will increase by another 2 million b/d next year leading to another major price spike and subsequently serious economic damage.