Developments this week
On Tuesday NY oil closed at $90.21, the highest settlement since early August. Then on Wednesday prices fell to close at $88.91 after the EIA reported a much larger-than-expected increase in US gasoline and distillate stockpiles. In London Brent has been more stable, trading around $112 a barrel this week. The premium of London over NY oil fell to $23 a barrel this week after closing at a record high of $26.62 on September 6th.
The EIA also reported a decline of 6.7 million barrels in US crude stocks, but traders attributed this largely to the tropical storms which closed down much of the Gulf’s oil production last week. For now, the markets are more concerned about falling gasoline sales in the US which dropped to 8.8 million b/d last week, the lowest level since May.
The twists and turns of the EU’s sovereign debt crisis dominate the oil and equity markets. Concern is growing over the possibility of a Greek default, the stability of the banks that hold the Greek debt, and the future of the European Monetary Union.
Libyan oil officials say they have begun pumping some 160,000 b/d to costal oil storage facilities. This amounts to about 10 percent of Libya’s pre-insurgency production. The conventional wisdom is that 300,000-400,000 b/d of oil production will be relatively easy to resume, but to get back to 1.6 million may take another 18 months or longer.
OPEC and the IEA’s Oil Market Report
On Monday OPEC cut its estimate of the demand for next year, followed by the IEA on Tuesday, in the face of a worsening economic outlook. OPEC is now forecasting that the demand for oil will grow by 1.06 million b/d this year and 1.27 million b/d in 2012. The IEA is now also saying that demand this year will increase by 1 million b/d but that next year’s demand will only increase by 1.4 million b/d over this year. The reduction in demand of 400,000 b/d next year is a fairly large one and could be important in keeping prices under control for the coming year. The Agency, however, notes that this estimate may be optimistic in light of the economic storms that seem to be forming. If growth in the OECD economies is hit hard next year, the growth in demand could be as little as 400,000 b/d.
The IEA remains concerned that demand will still be outrunning production in the coming year with the difference coming from global stockpiles. The situation is not expected to be as bad as it was in late in 2010 when demand was running 1.4 million b/d above production, leading the Agency to orchestrate a release of crude from strategic stockpiles to keep down prices. The IEA is still projecting a shortfall in the coming year if global demand continues to grow. The pace at which Libyan oil returns to the export market is the major unknown in this situation as foreign oil companies are unlikely to return their people to the country until the security situation is under control.