Developments this week
After falling $6 a barrel since the middle of last week, NY crude rebounded on Wednesday to close up $1.14 a barrel at $87.33. Prices rose on optimism about US economic recovery despite an unexpectedly large increase of 4.8 million barrels in US crude stocks. In London Brent crude climbed $2.52 a barrel to close at $97.77, a premium of $10.44 over US crude. Large stockpiles at Cushing, Okla. and maintenance outages slowing production from the North Sea are seen as the reasons behind the price differential.
Wholesale gasoline in NY which had fallen 15 cents a gallon in the last week reversed on Wednesday, settling up almost 9 cents a gallon. Demand for fuel in the US slipped 1.6 percent last week to 18.9 million b/d.
In a speech on Monday, Saudi Oil Minister al-Naimi predicted a strong increase in demand from India and China this year will lead to an increase of 1.5–1.8 million b/d in global demand during 2011. This is more than the 1.4 million b/d increase predicted by the IEA in its most recent forecast. In Beijing, the China Petroleum and Chemical Industry Association reinforced this view by announcing that it expects crude refining in China to increase by 7.5 percent this year.
The oil minister went on to say that he expects prices to remain stable throughout the coming year unless there is too much intervention by speculators. He noted that the Saudis have 4 million b/d of spare capacity and suggested that they would be willing to increase production to keep prices from going higher. Goldman Sachs notes that global crude stockpiles fell less than expected in November and December and suggests that OPEC is already dipping into its spare production capacity to satisfy recent increases in demand.
In his talk, al-Naimi was more upbeat than usual suggesting that the recession is over and that there will be economic growth in the years ahead.
Baghdad has agreed to pay companies that are pumping Kurdish oil. Exports via the northern pipeline are expected to resume on February 1. If all goes well, Iraq will increase its oil production to 3 million b/d from the current 2.4 million by the end of the year. It is counting on exports of Kurdish oil to help reach this goal. Meanwhile car bombs continue to go off in Iraq.
Global Food Supplies
Concern is growing that food shortages across Asia are leading to rapidly rising food prices that, with the increasing cost of fuel, will stifle economic growth in the region. The UN’s food index shows prices now have reached record levels and are poised to move still higher. In China a prolonged drought across the northern provinces is threatening to devastate this year’s wheat crop further threatening the food supply for millions. The drought, said to be the worst in 60 years, has left Beijing with no precipitation for the last 90 days. The Chinese have already stepped up food imports and recently concluded one of the largest purchases of US soybeans on record. It seems likely that food prices as well as oil prices will play a major part in events during the coming year.