Despite numerous warnings that the current rally is premature from Goldman Sachs and other observers, oil prices continued to climb this week closing Wednesday at $38.29 in New York and $41.07 in London. The rationale for the price increase, despite continuing growth in crude stockpiles, is the expectation that oil production is falling and a production freeze, not a cut, will be worked out among the major oil exporters. The market continues to ignore statements from Iran that it has no intention of freezing its oil production until its exports return to pre-export levels of circa 4 million b/d.

There is evidence to support the idea that a decline in oil production is underway. Iraq’s export pipeline through Turkey remains shut; several US shale oil producers have announced cutbacks; a major export hub is out of service in Nigeria; and Iran is having trouble selling its increased oil production to former customers in Europe.

The Wednesday US stocks’ report showed US crude inventories up by 3.9 million b/d, including a 690,000-barrel increase at the Cushing, Okla. tank farm. This increase supports the warnings that there soon may be a storage crunch that would drive down prices. For now, however, an unusually large drop in US gasoline stocks of 4.5 million barrels coupled with the report that US gasoline consumption for the last four weeks was 7 percent higher than last year was enough to push prices higher.

Washington’s EIA joined the International Energy Agency is forecasting that oil production will not fall enough to eliminate over-production this year and that Brent crude prices will only average $34 a barrel this year and $40 in 2017. The EIA and Goldman’s are both talking about considerable volatility this year with oil trading between $20 and $50 a barrel. US crude production is now forecast to drop to 8.19 million b/d in 2017, down from 8.67 this year.

The EIA also noted in its Short Term Energy Outlook that US natural gas inventories will likely end the winter heating season at 2,288 billion cu. ft., which would be 54 percent higher than last year. Spot natural gas prices, are expected to average only $2.25 per million BTUs this year as compared to an average of $2.63 in 2015.

Baker Hughes announced that the total world oil and gas rig count, without the FSU and inland China, was 1761 in February, down 52 percent from December 2014. It is numbers like these that have the market expecting that eventually there will be much higher oil  prices.

There is still no word on the status of Kurdistan’s oil export pipeline which provides nearly all of the province’s revenue. With Kurdistan going broke, it will be hard for the Kurds to keep fighting ISIL in eastern Iraq and Syria.

Chinese crude imports hit a record of 8 million b/d in February despite severe economic problems and contracting imports and exports. One reason for the surge may have been the extremely low oil prices in January which attracted more buying for strategic stocks and to refine for exports. China’s small independent refiners were only recently allowed to import oil for their needs rather than procuring it domestically.