Developments this week
Oil prices had a short-lived bounce on Monday up to a 27-month high of $92.58 a barrel. Tuesday and Wednesday morning was a time of profit taking combined with a general commodities sell off that sent oil as low as $88.10. A stronger dollar helped with the decline. Better employment news coming on Wednesday morning, however, sent oil up to a close of $90.30. In London Brent crude continues to trade well above New York, closing at $95.50 a barrel.

The weekly stocks report showed the US crude inventory falling by 4 million barrels, double what the analysts were expecting. Gasoline inventories were up by 3.3 million barrels, distillates up by 1.1 million and total commercial inventories were down by 6.3 million barrels.

The EIA reported that US demand over the last four weeks was right at 20 million b/d, 4.4 percent higher than last year. MasterCard, however, reported that gasoline demand last week fell 13 percent in the week ending December 31st to 8.41 million barrels. The drop was attributed to the heavy snow along the East Coast, higher gasoline prices (up 40 cents a gallon over last year) and the general economic malaise.

The market’s mood is still one of optimism that this week’s sell-off is only corrective profit taking and that there will be economic recovery and higher oil prices in the year ahead. Analysts appreciate that the demand for oil has been running ahead of production increases recently, but expect OPEC to open the taps and increase production in the coming year.

Although the moratorium on deepwater drilling was formally lifted in October, few new permits have granted. On Monday the administration announced that new policies and regulations have been formulated so that drilling should begin in a few weeks.

The IEA issued a new warning that increasing oil prices will derail the economic recovery unless OPEC increases production. This of course assumes the Saudis and their neighbors actually have at least some of the spare capacity they claim.

Severe flooding continues in Australia and the price of coal continues to rise. In the most trouble are the Korean and Japanese steel industries which depend on coking coal from Queensland. The Chinese who are just starting to import large quantities of coal may also feel the pinch.

Paying the Iranians
On December 27th, the Reserve Bank of India announced that oil trades with Iran can no longer be settled within the Asian Clearing Union, a regional paying arrangement in which participants settle in euros and dollars. This immediately set up a problem of just how Indian refiners are to pay for the roughly 6 million metric tons of crude they import from Iran each year. Negotiations are still going on and for the time being, Tehran seems to be extending credit for its oil until a mechanism for paying for the shipments, possible in yen, dhirams or rials is developed.