Developments this week
Crude futures fell to a four-month low on Wednesday on fears that the Greek debt crisis and a slowing US economy will reduce the demand for oil. NY oil was down $4.56 to close at $94.81 and London’s Brent fell $2.95 to settle at $117.21. Oil prices are now the lowest they have been since before the Libyan uprising shut down 1.3 million b/d of oil exports. The fall in prices came along with a fall in the euro and a substantial drop in the equity markets. The weekly US stocks report implied that US demand for oil products has been slipping in recent weeks. The report, however, showed an unexpected decline in US crude stocks of 3.4 million barrels. Much of the drop in inventory may be due to the week-long closure of the Canada to Cushing Keystone pipeline that was shut down for a week to repair a leak.
The Greek debt crisis has morphed into a political crisis with crowds taking to the street and the government reorganizing before seeking a vote of confidence. S&P cut the rating on Greek debt once again. The fiscal and political turmoil sent the euro down 1.7 percent on Wednesday to close at $1.418. Various US reports released in the last few days show little or no economic growth.
The fall in prices comes at a time when the major oil market watchers are predicting that there will be a shortfall in oil production over the next six months which should lead to higher prices.
Newly released Chinese economic data suggests the economy is holding steady despite another jump in inflation and a small drop in apparent fuel consumption during May. Chinese electricity consumption slowed a bit last month but still was 10.8 percent higher than in May of last year — suggesting that overall economic growth is still doing pretty well. After the government announced that consumer prices rose by 5.5 percent in May, the Central Bank raised reserve requirement by 50 basis points. Much of the inflation is due to higher food costs caused by the ongoing drought which has now been somewhat ameliorated by heavy rains and floods in the drought-stricken provinces. The floods, which resulted from heavy rains falling on parched earth, of course are not doing much for food production either. There has been a wave of social unrest culminating in riots across south China in the last few weeks due to an accumulation of economic and political grievances. Although rarely reported in the west, public disturbances of varying sizes in China are now believed to be on the order of 100,000 or more a year. Beijing always moves promptly with whatever force is necessary to disperse rioters.
A Platts survey showed OPEC increasing its oil production by 200,000 b/d in May. Most of the increase came from Saudi Arabia. Collectively, OPEC is on track to take in more than $1 trillion in oil revenues this year. The IEA will release its assessment of OPEC’s production in May later today.
Nigeria declared force majeure for two months on shipments of Bonny Light crude — likely due to an accumulation of minor incidents of sabotage. This could translate into some 200,000 b/d of lost exports.
Widespread power outages continue to plague Venezuela. The government continues to insist that they are having no effect on oil production.