Developments this week
A combination of a stronger euro, an unexpected drop in US crude inventories, and a leak in the Trans Alaska Pipeline sent crude prices up from circa $88 a barrel late last week to a close on Wednesday of $91.86, the highest close in 27 months. In London, Brent crude settled at $98.12 a barrel — striking distance of $100.
On Wednesday afternoon Trans Alaska Pipeline operator Alyeska announced that the pipeline which normally transports some 640,000 b/d mainly for West Coast US refineries had reopened at a rate of 400,000 b/d. The pipeline, however, will have to be shut down again to install a bypass around the leak. The leak, apparently a minor one, has allowed at least 107 barrels of crude into the basement of a pumping station but occurred at a point where the pipe was encased in concrete. Fears that the pipeline could be damaged or disabled by freezing temperatures and a lack of a hot oil flow through it led to the reopening of the pipeline after four days as much the lesser of two evils: a small, contained leak vs. California without gasoline.
The week’s US stocks report showed a 2.2 million barrel decrease in the US crude inventory. As inventories usually rise in January, after inventory-tax-assessment day on the first of the year, the fall came as a surprise to most analysts who were expecting an increase in crude stocks. Gasoline and distillate inventories increased, however, leaving total commercial petroleum stocks up by less than 1 million barrels. Demand, while still higher than last year, is falling from what we saw in December. Average national US gasoline prices are now at $3.09 a gallon and climbing.
The Wall Street Journal is starting to get nervous about what steadily increasing oil prices will do to its much-hyped economic recovery this year. The newspaper notes that US consumers are in much worse condition to handle $4 gasoline than they were three years ago.
The EIA’s Short-Term Energy Outlook
In its January edition released on Tuesday the Administration breaks some new ground by releasing forecasts through December 2012. The usually conservative EIA predicts that oil will average $93 a barrel in 2011, and that this will increase to $99 a barrel in the fourth quarter of 2012. Interestingly enough, the Administration goes out on a limb and mentions that it foresees an 8–10 percent chance that gasoline could touch $4 a gallon next summer.
Despite the growth in demand of 2.2 million b/d that occurred in 2010, the EIA foresees only a 1.4 million b/d increase in demand this year and a 1.6 million b/d increase in 2012. Increases in non-OPEC production of only 160,000 b/d in 2011 and 20,000 b/d in 2012 are foreseen. To meet this 3 million b/d increase in demand over the next two years, the EIA sees OPEC increasing its crude output by 1.6 million b/d and its NGL production by another 1.1 million. To achieve this, OPEC’s spare capacity will only fall from 4.7 to 4.3 million b/d by the end of 2012 — assuming of course that it is really there.
