Prices and production

This week oil prices moved up sharply in response to a weaker dollar, which closed at $1.50 against the Euro, and falling gasoline inventories. On Wednesday, crude climbed to $82 a barrel closing at $81.37 for a $2.88 or 2.7 percent gain for the day.

The US stocks report showed crude inventories gaining by 1.3 million barrels as refiners are keeping gasoline production low in an effort to force up prices. Gasoline imports fell to an unusually low 649,000 b/d last week which resulted in inventories falling by 2.3 million barrels vs. an expected 800,000 barrel drop. On Wednesday gasoline for November delivery climbed 6.38 cents a gallon despite a 3.3 percent drop in US demand for gasoline to an average of 8.9 million b/d.

The sudden jump in oil prices after trading in a $60 to $75 range for the last five months has brought forth a flood of commentary on the prospects for oil. Technical analysts, who were talking about $90 oil last week, are now talking about $100 oil based on the suddenness and strength of the move. Other analysts say oil has become the hedging tool of choice and believe prices will continue to rise as long as the dollar remains weak.

OPEC is already becoming uncomfortable with oil being driven higher by the sliding dollar, links to equities, and speculation as these are forces over which the cartel has no control. The group says there are still 125 million barrels of crude and products in floating storage and there is no need to increase production until these surpluses are used up. The cartel appreciates that very high oil prices are bound to cut into demand and foster the efforts for increased conservation and other sources of energy.

Investors too are starting to show concern that very high oil prices will stymie an economic recovery and send the equity markets into another decline.

Iraq

There has been much news of pending oil deals coming from Baghdad this week. After a disastrous auction in June in which only one of eight possible contracts was awarded, the Iraqis appear to have sweetened the pot to the point where half a dozen major international oil companies are close to signing deals. Iraq is believed to have 115 billion barrels of proven, easy to produce reserves, yet is pumping only 2.4 million b/d.

There is still a ways to go before increased oil flows can begin. Elections are coming up soon and the government is sensitive to charges it is giving away the country’s patrimony to foreigners. The dispute with Kurdistan has yet to be resolved and there are many questions about the security situation as US troops pull back and then begin withdrawing from the country.