The oil price rally which started last winter remained stalled in the high $60s a barrel this week as the markets balanced faltering consumption against the strength or weakness of the dollar. On Wednesday prices fell after the Department of Energy reported that domestic demand for oil fell by 1.1 million b/d last week. Crude inventories declined by 3.8 million barrels from the previous week, but gasoline inventories increased by 3.6 million. Total demand for petroleum products in the US is now down by 6.6 percent compared with last year. Distillate demand, which is mostly diesel at this time of year, is down by 9.3 percent and jet fuel demand is down by 13.9 percent. Gasoline consumption is still up slightly, but gas prices are $1.40 a gallon cheaper than they were at this time last year.
The increase in gasoline inventories comes at a time when increased summer driving usually draws down gasoline stocks. Surveys indicate that driving will be down over the 4th of July holiday. Gasoline futures have fallen nearly 20 cents a gallon in the last week suggesting that we may have seen the summer high for gas prices.
While fundamentals say gasoline prices should be falling, the future of the US dollar and its effect on oil prices remains unclear. Large amounts of US Treasury securities will continue to be auctioned off for the foreseeable future and many are concerned about the impact of these sales on interest rates and the value of the dollar.
The militants in the Niger Delta have continued attacks on oil facilities. A new report says that Nigerian production is now down to around 1 million b/d which is well below its OPEC quota of 1.67 million.
The Japanese report that their crude imports fell for the seventh month in May and are now 18.8 percent lower than last year.
The IEA warned once again that there will be a supply shortage by 2014 if the world economy resumes growing, even slowly, in 2011 and 2012. After joint talks, the EU and OPEC warned that there could be another speculative oil bubble unless there are financial reforms.
Next week, Baghdad plans to auction off oil contracts to foreign companies for the first time since nationalizing its oil industry more than 30 years ago. The plan has become highly controversial and the government is coming under increasing attack for “giving away the country’s oil.” Clearly on the defensive, Oil Minister Shahristani issued a statement claiming that Iraq will earn 100 times more than the oil companies from the increased production.
In the meantime, US troops are preparing to pull back from cities, leaving security to the Iraqis. Sectarian suicide and truck bomb attacks already appear to be on the rise, leaving the future of Iraqi oil production an open question.