Developments this week
Oil prices moved sharply higher this week. After opening just above $81 a barrel on Monday, the front month was trading as high as $85.36 on Wednesday afternoon. In London, Brent futures settled at $86.38 a barrel. Much of the impetus for the recent price move was due to the Federal Reserve’s controversial new plan to buy $600 billion of US Treasury debt over the next eight months. The dollar has dropped nine percent against the euro since August when another round of quantitative easing was first mentioned by Federal Reserve officials. An unexpected surge in Chinese manufacturing, announced on Monday, also helped oil prices.
The weekly US stocks report showed crude inventories increasing by 2 million barrels; however, large decreases in gasoline and distillate stocks left total commercial petroleum inventories down by 5.5 million barrels last week, contributing to the price jump on Wednesday. US gasoline consumption remains flat, but distillate demand over the last month is up by 11 percent over last year. The refiner’s profit (crack spread) has fallen so low that refinery utilization was down to 82 percent of capacity contributing to the increase in crude stocks and the drop in products.
US natural gas prices fell 5 percent on Monday to close at $3.83 per million BTUs. There is simply too much gas in storage and demand is too weak to support higher prices.
Saudi Oil Minister al-Naimi has redefined his “ideal” oil price range upwards from $70-80 a barrel to $70–90, more in line with reality. Meanwhile the Libyans are saying oil should be back around $100 to compensate producers for the drop in the value of the dollar.
One of the big winners in Tuesday’s election was the oil and coal industries who now have less to fear from administration efforts to regulate them and cap emissions. In California, an effort to suspend the state’s climate law was rejected by the voters.
BP says the cost of the Macondo oil spill is now approaching $40 billion.
A deadly siege of a Christian church and a dozen coordinated bombings across Baghdad killing and wounding hundreds suggest the security situation is deteriorating as the government stalemate enters its ninth month. The outlook for major increases in oil and gas production in the immediate future remains in doubt.
China and India
New figures suggest there has been no slowdown in the pace of China’s economic growth. The expectation is that demand for increased oil imports will continue to climb, offsetting little to no growth in OECD demand. Coal shortages are starting to develop in China as electricity demand continues to grow and colder weather sets in.
India too continues to grow at 8.5–9 percent a year, increasing its demand for fuel imports. The government projects a 40 percent increase in the need to import fossil fuels over the next 10 years. India’s prime minister is pushing Indian firms to emulate the Chinese and begin buying up foreign fossil fuel assets to support the country’s growth over the next decade.
