Developments this week
With little news concerning the Iran confrontation or the EU debt crisis, the oil markets were flat this week, drifting down a bit on Wednesday to close at $105 in NY and $125 in London as the Euro fell against the dollar. The weekly US stocks report showed crude inventories climbing by 1.8 million barrels while gasoline and distillate stocks fell by 6.1 million. Total consumption increased by 2.2 percent last week, but over the last 4 weeks US gasoline and distillate consumption are down by about 7 percent as compared to last year. MasterCard says that US gasoline consumption last week was down by 7.2 percent as compared with last year. This was the 28th straight week in which gasoline consumption was lower than in the preceding year.

The growing crude glut at the Cushing delivery point – up 7 percent last week to a six-month high of 38.7 million barrels continues to keep pressure on the NY markets so that the NY/London spread is now approaching $20 again.

The natural gas glut continues to grow as warm weather dries up demand for heating. On Tuesday gas prices slid to a 10-year low of $2.20 per million BTUs. The low natural gas prices are forcing down coal prices as power companies switch to natural gas. Last week Appalachian thermal coal fell to $58 a ton – the lowest in two years.

On Wednesday, the IEA released its monthly Oil Market Report. The marquee number of growth in demand for oil during 2012 remained unchanged from last month at 800,000 b/d. OPEC production is reported as having risen by 315,000 b/d in February as Saudi production climbed to a 30 year high, and Libyan output is back up to 1.3 million b/d.

The Agency notes that there is more uncertainty than usual over the direction of the oil markets due to the Iranian confrontation and the possibility of economic setbacks due to very high oil prices. Concern is expressed over the status of OECD oil stockpiles, which while still large, have been falling steadily since mid-2010. The recent jump in OPEC (read Saudi) output means that global spare production capacity which has been sinking for over a year, is now down to circa 3 million b/d. The IEA notes the last time spare capacity got below 3 million b/d prices went on a sustained rise. Some observers believe that the 3 million b/d number is an overestimate, noting how long it took the Saudis to up their production after the Libyan uprising cut output.

There are currently supply outages in the non-OPEC world such as in Sudan, Syria, Yemen, and the North Sea that has oil production about 750,000 b/d lower than expected. These outages, some of which look as if they will continue for a while, have caused the Agency to reduce non-OPEC production by 200,000 b/d from last month’s forecast.

Elsewhere a new poll shows that 57 percent of the Japanese are opposed to restarting the country’s nuclear reactors and 80 percent do not trust the government to operate the nuclear reactors safely. This suggests that larger Japanese oil and natural gas imports may be here to stay.

India’s endemic coal shortage seems to be getting worse with numerous generating stations down to a few days’ fuel supply. It is not yet summer and it looks as if hundreds of thousands will soon be facing rolling blackouts.