Prices and production

Crude prices hovered around $71 a barrel this week, with the now-normal dips as the dollar strengthened and jumps as the dollar weakened. In between, news of the fundamentals contributed a bit to the movement. This week’s inventory report showed US crude stocks falling by 3.9 million barrels, nearly double what had been expected. Of more interest was the 1.3 percent jump in US fuel consumption to 19 million b/d. US gasoline consumption over the last four weeks is up by 1.1 percent over the same period last year. This increase is surprising given the slumping economy and rising gasoline prices which are approaching $2.70 a gallon nationwide. In California prices are already over $3 a gallon.

The militants in Nigeria blew up another pumping station and are threatening attacks on offshore platforms. Shell has extended force majeure on shipments from its Forcados terminal through July.

The labor unions in Venezuela are threatening unrest after 10,000 workers were left unemployed when President Chavez nationalized 70 oil service firms. The unemployed workers are only rehired by the state oil firm after careful political screening to insure loyalty to Chavez.

Oil prices have remained in the vicinity of $68 to $70 a barrel for nearly three weeks as the markets weigh conflicting signals. In the short term there is clearly adequate production and all indications are that the OECD economies are still contracting. Optimists continue to interpret indications of slower contraction as signals that economic growth will resume soon.

There is growing appreciation that the oil industry will have a difficult time meeting any significant increase in demand for oil and that prices are likely to increase rapidly. On top of this are fears that massive US and European deficit spending will lead to inflation, weakness of the dollar and higher oil prices. There is no clear end to this balance of forces, so the present standoff could last for many weeks.

Iran

Among the many interesting aspects of last week’s Iranian elections is that five days of nearly continuous demonstrations have had no discernable impact on world oil markets. Only a few years ago, this situation would have resulted in an instant price spike of several dollars a barrel.

Tehran has issued reassuring statements that the demonstrations pose no threat to oil production. More important is the surplus production capacity of a reported 6 million b/d that currently exists within OPEC. There appears to be more than enough productive capacity available to replace all of Iran’s 4 million b/d should the situation ever deteriorate to the point where Iranian oil production is threatened.