Developments this week
Oil prices fell on Monday as traders worried about the EU’s sovereign debt problems and slackening demand in the US. Prices turned around and climbed on Wednesday after the EIA’s stocks report showed an unexpectedly large drop in US crude and gasoline inventories and Federal Reserve Chairman Bernanke hinted that there might be another round of quantitative easing later this year. The move was helped by Beijing’s release of economic data showing that its economy grew by 9.5 percent, year over year in the second quarter which was slightly more than analysts had been expecting. NY oil closed on Wednesday at $98.05 a barrel and London closed at $118.71.
The 800,000 barrel drop in US gasoline stocks sent NY futures higher, at one point trading at $3.17 a gallon, only 24 cents below the highs reached in early May. Demand for gasoline and diesel in the US is weakening. The EIA says that gasoline consumption over July 4th holiday was the lowest since 2003 and distillate demand was at a 20 month low last week. Total US oil consumption over the last four weeks was down by 1.5 percent compared with last year.
The IEA’s monthly report
The Agency is trying hard to justify its orchestrated release of 60 million barrels of crude from reserve stocks last month. Although oil prices are now back to where they were before the release, the IEA points out that the action has helped realign the price differential between sweet and sour crudes which had been distorted by the Libyan uprising.
The IEA increased its forecast for average global consumption in 2011 to 89.5 million b/d, an increase of 1.2 million b/d over last year. For 2012, the Agency is expecting another increase of 1.5 million b/d for a total global consumption of 91 million b/d in 2012. This is getting very close to the figure that some observers believe is the highest the world will ever produce.
Global oil supply in June is believed to have been 88.3 million b/d, an increase of 1.2 million b/d over May production. The marquee news from the monthly report was that the IEA credits the Saudis with increasing their production by 700,000 b/d to 9.7 million last month – the highest monthly production since February 2006. The Agency says that July production could hit 10 million b/d, a level not seen for decades.
The downside to the report was that much of the extra oil the Saudi’s are producing is believed to be going to domestic consumption to keep the air conditioning and desalinization plants running during the hot summer months. The Saudis have been increasing the use of crude in their thermal power plants since 2004 and will likely set a record this year.
The IEA warns that the additional oil available for export is not enough to meet rising demand from Asia and that current OPEC production of 30 million b/d is still about 1.3 million b/d less than demand in the current quarter. There are already indications of global stocks being drawn down to meet demand.