Developments this week
After climbing from the low $80s last week, oil prices have bounced around $87 a barrel, closing on Wednesday at $87.81, the highest settlement price since October 2008. In London, Brent crude closed more than a dollar higher at $89.16. This week oil prices rose in spite of a strengthening US dollar, indicating that the fundamentals of supply and demand are becoming stronger as a determinant of oil prices.
Much of the increase on Wednesday was due to the weekly stocks report which showed an unexpectedly large drop of 11.8 million barrels in total commercial inventories. Demand for distillates in the US was up by 24 percent over last year, but a large share of this may be due to increased distillates export from the US. Gasoline in New York rose five cents a gallon to close at the highest since last May.
Although Chinese oil imports in October fell from September levels, all other indications suggest that demand will continue strong with refinery processing setting records and reports of diesel shortages and rationing in parts of the country. Oil product imports, however, increased by 18 percent in October. Overall Chinese exports in in October increased by 23 percent over October 2009 while imports increased by 25 percent.
The surge in oil prices to closes above $87 a barrel has technical analysts predicting still further increases. Many are talking about oil moving above $90 later this month and some are beginning to talk about oil rallying to $105 in the next six months. Without setting a number, Goldman Sachs is now saying that oil will be “substantially higher” by 2012. The problem remains, of course, that at some point high oil prices will begin to stifle growth and demand will fall. Opinions vary as to just what price level will lead to major drops in demand.
In the Middle East, the Iranians are offering to resume negotiations with the major powers over their nuclear program in late November or early December. In Baghdad, bombs targeting Christians continue to go off.
In Nigeria, the MEND militants are back on the warpath and are threatening to start attacks on oil installations “very shortly”. The last time they did this, between 2006 and 2009, Nigeria’s oil output fell by more than 28 percent.
Chevron plans to spend $3.2 billion to buy a stake in the Marcellus shale field from Atlas Energy. The EPA has stepped up the controversy over fracking in shale gas fields by issuing subpoenas to Halliburton about the nature of the chemicals used in the fracking process.
The International Energy Agency released its annual, and controversial, magnum opus World Energy Outlook 2010. Ever since IEA stopped assuming that there would always be enough oil to meet growth during the following 25 years, it has pursued a delicate balancing act of projecting enough oil for the global economy to continue to grow without postulating absurd numbers. This year Outlook 2010 takes a new tack and projects three cases: business as usual; new energy policies; and a major effort to reduce carbon emissions. IEA is also starting to talk about peak global oil production, but in a manner that does not admit geologic constraints.
