Crude has risen steadily this week, settling at a 17-month high on Wednesday at $83.76. This is the highest close since October 2008 when oil was falling from $147 a barrel. The impetus for the move was likely a falling US dollar, since the weekly stocks report showed crude stocks increasing by 2.9 million barrels and gasoline stocks increasing by 313,000 barrels.
Oil prices may be at a critical juncture. Technical analysts point out that if oil prices clear resistance levels at $84 and $85.50, the way is clear for oil to move up into the $90’s -- where many foresee increasing damage to the prospects for economic recovery. Fundamentals analysts continue to say prices are too high, when looking at adequate oil supplies and increasing stockpiles. These observers continue to insist that oil would be selling for $70 a barrel except for technical factors involving the volatility of the US dollar which closed down Wednesday at $1.35 against the Euro.
Many observers are worried about the US gasoline situation. Refiners have been increasing production in recent weeks, hence gasoline production last week was 3.5 percent higher than last year. US gasoline inventories for the last week in March are at a 17-year high and some in the industry worry that the normal increase in summer driving will not be sufficient to draw down these inventories. Nevertheless, gasoline futures on Wednesday rose 3.5 cents to settle at $2.31 a gallon.
A Bloomberg survey showed OPEC production slipping by 30,000 b/d in March as Iraqi production slumped. The other OPEC members with production quotas took advantage of the high prices and increased production by 55,000 b/d, putting them nearly 2 million b/d above the official quota.
During an interview with the French newspaper Le Monde published last week, Glen Sweetnam, one of the Energy Information Administration’s experts on oil, confirmed that the office understands and accepts the idea that world production of liquid fuels could experience a decline between 2011 and 2015 if there is not sufficient investment. The EIA, however, dismisses the idea that a decline in global production will be irreversible, preferring the concept of an “undulating plateau” that will continue for several years.
Even the notion that a decline in production may be imminent marks a major shift in official admissions by any US government spokesman.
There is increasing discussion that Caracas’s hydro-power crisis could morph into a political crisis that might bring down the Chavez government. This week Venezuela is on a Chavez-ordered week-long national holiday to save electricity and the government is busy sending troops to shopping areas to force stores to close down.
The drought continues and unless heavy rains come soon, over half the country’s generating capacity will have to be shut down somewhere around the last week in May. Even if the summer rains allow resumption of electricity generation in the summer, the water levels are so low that, unless the rains are unusually heavy, water shortages may resume in the fall or winter. It seems likely that at some point there will be a significant impact on Venezuela’s 2.2 million b/d of oil production.