Prices and production
After setting six-month highs above $68 a barrel on Monday and Tuesday, oil prices broke on Wednesday dipping as low as $65.44 on preliminary reports that unemployment in the US moved up to 9.2 percent in May. This news, coupled with a report showing that services are still contracting and a warning from Federal Reserve Chairman Bernanke that the US cannot borrow indefinitely, sent the equity markets, the dollar, and commodities down.
The weekly stocks report showed that contrary to analyst expectations, the US crude stockpile has resumed climbing; refinery utilization was at the highest level in six months; imports climbed; and the demand for petroleum products in the US is at the lowest level since May 1999. Gasoline consumption slipped over 500,000 b/d to 9.0 million b/d suggesting that the recent increase in gasoline prices which are now about $2.55 a gallon may be affecting discretionary driving --- even over the Memorial Day weekend.
While $2.50 a gallon did not seem to faze motorists last year, the employment situation in 2009 is considerably worse with millions out of work and millions more forced to take pay cuts or work reduced hours. In this environment, $2.50 or $3 gasoline may have a greater impact on discretionary driving and demand for gasoline than last year.
Analyst and oil company surveys show that OPEC oil production probably increased by as much as 400,000 b/d in May despite the rhetoric about adhering to quotas. The doubling of oil prices over the last four months likely has left OPEC members less concerned about quotas and more interested in cashing in while oil prices are high.
Beijing announced it has completed filling the four strategic oil storage sites that it built along the coast last year and will suspend purchases for its strategic stockpiles for a while. A second phase of constructing inland storage sites is to begin next year.
Official export of oil from Kurdistan, via the northern pipeline to Turkey, began this week despite the lack of an agreement on nearly everything to do with oil between the Kurds and Baghdad. The drop in oil prices and aging facilities in the south has left the Iraqis in such dire economic straits that they apparently decided to let the Kurds begin exports and leave the division of revenues to later.
After several months of rising oil and stock prices, we could be approaching some sort of a turning point. Most of the recent gains have been based on expectations that a rebound is near, rather than on economic fundamentals or supply and demand. As skepticism grows that a significant economic turnaround will happen this year, and as worldwide crude inventories continue to grow, the situation appears ripe for lower prices.