Prices and production

After flirting with recent highs above $87 a barrel, oil fell rapidly last Friday on a combination of the Goldman-Sachs fraud case and the Icelandic volcano which cut jet fuel consumption by as much as 1 million b/d. Prices stabilized this week around $83-84 a barrel on hopes that Europe would soon begin flying and expectations that US oil inventories fell last week.

When the EIA report showed a significant increase of 10.7 million barrels in US crude and oil product stockpiles, contrary to analysts and API expectations, oil settled from above $84.30 a barrel before the report to close at $83.64. Much of the increase was due to a large jump in crude imports which rose 8.3 percent to 9.6 million b/d. A strengthening dollar, attributed to a worsening outlook for Greek debt, also contributed to Wednesday’s price drop.

China is making a $20 billion loan to Venezuela to help develop the Orinoco heavy oil fields. Venezuela is already exporting 460,000 b/d to China and will soon be sending more to payoff the increasing debt.

The volcano

Although the Eyjafjallajökull volcano is still erupting, a combination of less ash being ejected at lower velocity and a wind shift permitted European governments to call off the flight ban on Tuesday-Wednesday after 100,000 flights had been cancelled and $1.7 billion in airline losses. By historical Icelandic standards, this was a rather small eruption which may not be over yet. The last time Eyjafjallajökull erupted, it continued for more than a year, which suggests that the problems for European air travel may not be over yet.

Although possibly short-lived, this eruption is the first to result in a major disruption in air travel in the decades since flying became the predominant means of long distance travel. Far larger and more disruptive eruptions have taken place in Iceland in recent centuries and scientists note that melting glaciers are reducing pressure on the land above magma chambers making it easier for eruptions to occur.

Update on the droughts

In the past week a major earthquake that killed thousands in southwestern China has drowned out reporting on the state of the drought that has enveloped the region. Some rain has fallen in the area, but it is still a few weeks before the monsoons—which in theory will replenish the depleted reservoirs and increase hydro production—are scheduled to begin.

Despite the worst drought in decades in the southwest and a second drought in the north, Beijing continues to report that its grain crops will only fall by one percent. This, of course, may be a deliberate underestimate to keep from spooking world grain prices.

Some rain fell in southern Venezuela last week, halting the precipitous drop in the reservoir that supplies 70 percent of the country’s electric power. Currently the Guri reservoir is stable at a very low level. The real test will come in the next few months, when heavy rains normally refill the reservoir and let water run over the top. If the heavy rain does not come this summer and Venezuela goes into the dry season next fall with inadequate water, then widespread blackouts are likely again next winter.