Developments this week
The downgrade of US government debt by S&P over the weekend sent the equity markets into a free fall taking oil along for the ride. NY oil futures which had been trading close to $99 a barrel at the beginning of last week fell steadily until they were trading below $76 a barrel during the Tuesday session – a fall of $23. On Wednesday oil prices reversed after the EIA reported that the US crude inventory had fallen by 5.2 million barrels as opposed to the 1.3 million barrel increase analysts had been expecting. NY crude then settled at $82.89 a barrel and in London Brent settled at $106.70 on Wednesday.

On Tuesday, the Federal Reserve announced that it would keep interest rates low for the next two years and would use other tools “as appropriate” to support the economy. This set off speculation that another round of quantitative easing was on the way which would send the dollar lower and oil prices higher.

Gasoline prices also rebounded Wednesday after the IEA reported that inventories had fallen by 1.6 million barrels last week despite an increase in US refining operations. Gasoline futures which traded as high as $3.14 a gallon at the beginning of the month touched a low of $2.59 on Tuesday – a decline of 55 cents a gallon. NY gasoline futures closed at $2.77 a gallon on Wednesday. The IEA also reported that US demand for oil products rose by 652,000 b/d to 20.3 million last week, the highest since last December.

Beijing reports that its inflation unexpectedly accelerated to a 37 month high in July with the CPI reaching 6.5 percent year on year. China’s trade figures for July showed that exports and imports rose faster than expected. Exports increased by 20.4 percent over July 2010 and imports increased by 22.9 percent. This suggests that China’s economy is still growing rapidly despite various surveys that show growth slowing. Chinese oil imports fell to 4.6 million b/d in July, the lowest level since October 2010. While some of this slowdown is due to a heavy maintenance schedule at Chinese refineries, it also suggests that the summer power shortages that were expected a few months back have not materialized. The Chinese are also rather good at timing their crude purchases to match slumps in the market — suggesting that we will see an increase in imports during August.

The IEA’s Oil Market Report
The agency confirmed that the Saudi’s increased their production by another 100,000 b/d in July to 9.8 million, their highest level of production in 30 years. The Saudis have now increased their production by 1.1 million b/d since the start of the Libyan uprising thereby replacing about 70 percent of the lost Libyan production. The quality of the oil produced remains a problem.

Of more interest is the IEA’s conclusion that the demand for oil has slowed markedly with the demand in June showing no increase from May. The Agency says it is cutting its forecast for demand increase in 2011 by 100,000 b/d based on slowing economic growth and, for 2012, is now contemplating the possibility that a flagging global economy could cut the increase in global demand for 2012 from 1.6 million b/d to 300,000 b/d. The agency, however, is still officially forecasting that 2012 demand will increase by 1.6 million b/d to 91.1 million b/d. This number, of course, is an amount the global oil industry is unlikely to achieve, suggesting that drawdowns of global stocks and higher prices are in the offing if an increase in demand of this size actually occurs in the next year or so.