After trading in a range between $36 to $38 a barrel since mid-December, oil prices broke lower on Wednesday closing at $33.97 in New York and $34.23 in London.  The 6 percent price plunge came after the EIA reported that US gasoline stocks jumped by an unexpected 10.6 million barrels last week – the biggest weekly gasoline inventory increase since 1993. The news sent gasoline futures, which had been trading as high as $1.34 a gallon on Monday, down to a close of $1.16. US gasoline is now selling for 26 cents a gallon in 1965 prices.
The news about the inventory, accompanied by weaker economic data from the US and China, was enough to overcome fears that the growing Sunni-Shiite confrontation in the Middle East could lead to lower oil exports. The general feeling is that the Saudi-Iranian row will not lead to hostilities, but will prevent any agreement to lower oil production. Many see a price war emerging as Iran tries to muscle its way back into the weak markets. US manufacturers saw the largest contraction in demand in more that six years in December. A new Chinese survey says that the services sector contracted last month along with manufacturing.
The Middle Eastern situation is becoming increasing muddled following the Saudis’ execution of a Shiite cleric; the storming of the Saudi embassy in Tehran; and breaking of diplomatic relations with the Iranians by the Saudis and several other Sunni states. Only the UAE, which has extensive trade with Iran, did not go along with breaking relations. From here on negotiations involving the Iranians over the situations in Syria and Yemen become more difficult if not impossible.
This week’s stocks report contained several noteworthy numbers. Not only did the US crude stocks fall by 5.1 million barrels while analysts were expecting an increase, but stocks at Cushing, Okla. rose by 917,000 barrels.  Distillate stocks rose by 6.3 million barrels so when combined with the 10-million-barrel increase in gasoline stocks and the drop in the crude inventory, total commercial inventories were up by 7.3 million barrels. Storage capacity must be getting tight someplace in the country which may account for some of the anomalies we are seeing.  Implied US gasoline consumption seems to be dropping more than normal for this time of the year. The bad weather and floods across the mid-west may also be having an impact on gasoline consumption.
Islamic State militants attacked two oil terminals, Ras Lanuf and Es Sider, in eastern Libya and set seven oil storage tanks on fire. Observers say the Islamic State is trying to weaken the government by destroying its only source of revenue.  Libya’s National Oil Company called for outside help to prevent its tank farms from being totally destroyed. These attacks could push the EU to intervene in Libya, a move that has been under consideration for several months.
In Venezuela, the opposition took control of the National Assembly this week after 17 years of being out of power.  The struggle for power between the Assembly and the Maduro government is just beginning as the economy continues to slide. The situation looks ripe for some sort of military coup or other upheaval which could well interrupt oil exports.