1. Prices and production
Oil started the week around $40 a barrel and then fell to circa $38 on Tuesday in sympathy with the 4.6 percent decline of US equity markets. On Wednesday oil fell again to just under $36 after the IEA released its monthly report forecasting an additional 500,000 b/d drop in world consumption in 2009.
The failure of oil prices to move much beyond $40 a barrel has resulted in threats of further production cuts by various OPEC officials. The cartel continues to claim that 80 percent of the announced 4.2 million b/d of production cuts already have taken place, while outside observers say that fraction is too high.
This week’s US stocks report has US refineries operating at a very low 81.6 percent of capacity and gasoline production down to 8.5 million b/d. US demand for gasoline is being made up by increased imports which last week reached 1.3 million b/d. Lower refinery usage resulted in the US commercial crude reserve increasing by another 4.7 million barrels last week, providing more rationale for yet another OPEC production cut.
Despite the flagging economy, US demand for oil products continues to move upward towards last year’s consumption levels. According to this week’s report from the EIA, total US demand for petroleum products is now down by only 1.3 percent as compared with last year, and gasoline consumption over the last four weeks is actually up by 0.1 percent as compared with the same four weeks in 2008.
The EIA and IEA released their short term forecasts earlier this week. As could be assumed, both see the demand for oil falling as a result of the global recession but not by spectacular amounts. The IEA now is forecasting that consumption in 2009 will drop by 1 million b/d to 84.7 million b/d vs. the high of 86.1 million b/d in 2007. Both agencies report that OPEC production continues to fall. The IEA says OPEC produced 950,000 b/d less oil in January. The EIA says OPEC production fell by 1 million b/d in the 4th quarter and will fall by another 1.6 million in the 1st for a total reduction of 2.6 million b/d. The EIA notes that this is about two-thirds of the 4.2 million b/d OPEC has pledged to cut.
The EIA notes for the first time concern about whether the large OPEC cuts will not lead to shortages and higher prices later in the year. The agency says that the demand for OPEC oil in 2009 should average 28.8 million b/d which is about 1.5 million b/d higher than the cartel’s current production goal.
Meanwhile world stockpiles continue to grow. OECD stocks in the 4th quarter grew by a counter-seasonal 170,000 b/d and probably increased by another 8 million barrels in January. In addition the Agency says there could be as much as 50-80 million barrels in short-term floating storage.