Developments this week
Oil futures in NY closed at $84.99 a barrel this week after touching $85.95 on Wednesday following the Israeli announcment that two Iranian warships were going to transit the Suez Canal on the way to Syria. In London, the Israeli announcement sent prices to $104.52, the highest since September 2008, before settling to close at $103.61. Although the Iranian ship movement was essentially harmless, the market reaction shows how jittery traders have become about developments in the Middle East this week. Clashes between police and demonstrators in Iran, Yemen, Bahrain, and Libya have sparked fears that unrest in the Middle East could eventually interfere with oil exports.

The weekly US stocks report showed inventories increasing by a less than expected 860,000 barrels for crude and 200,000 barrels for gasoline. An increase of 250,000 barrels at the Cushing, Okla. delivery point sent the premium for Brent over NY crude back to over $16 a barrel. The chorus of voices saying that NY futures contracts are no longer a global benchmark for world oil prices continues to grow. Some analysts are saying that the Cushing price distortion will remain until new pipelines are built to relieve the congestion. Gasoline futures in NY rose 5.6 cents a gallon on Wednesday.

Beijing announced that its trade surplus fell in January as increasing commodity prices pushed the value of China’s imports to near record levels. The Chinese also announced that price inflation in January was a lower-than-expected 4.9 percent. Foreign observers noted that Beijing is likely to be playing with its inflation numbers by reweighting its price basket so that rapidly rising food prices have less impact. Despite some scattered snowfall over the weekend, Beijing is still very concerned over the possibility that the winter grain crop will fail. In reaction to spreading alarm around the world that Beijing may be forced to buy food on the international market this year sending grain prices to new highs, China’s Foreign Ministry announced that the country has “plentiful” grain reserves and there is no cause for alarm. However, foreign specialists say it may be too late to avoid serious damage to China’s grain crops.

Of more interest was the announcement that China’s crude imports in January were up 27 percent or 1.1 million b/d over January 2010. At least some of this increase may be caused by increased water pumping to fight the drought in northern China. Should Beijing’s imports continue to grow at anything approaching this rate, the global oil markets are likely to become much tighter this year.

Budget struggles in Washington
The release of the Administration’s budget this week, which includes substantial increase for Department of Energy programs as well as cutting subsidies to the oil industry, marks the beginning of a struggle over priorities that will last for months. House Republicans are promising $60-100 billion in budget cuts, are threatening to defund the White House Energy Office, and cut parts of the EPA in order to forestall regulation of greenhouse gasses. Many newly elected Republicans doubt that climate change is occurring or that carbon emissions are a problem. There are some major fights ahead, which some fear could force a close down of the government.