Developments this week
Oil prices have had a volatile three days, falling from the Monday opening of $110 a barrel in NY to touch $106 on Tuesday, and then rebounding to close on Wednesday at $111.45 a barrel. The drop on Monday was precipitated by the Saudi oil minister’s statement that the kingdom had cut back oil production by 800,000 b/d in March as the markets were “oversupplied.” The rebound on Wednesday came from a combination of the falling dollar, which was trading around $1.45 to the Euro – the lowest since January 2010; a surge in the equities markets which sent the Dow to its highest level since June 2008; and the weekly US stocks report which showed US crude stocks dropping 2.3 million barrels, as opposed to analysts’ predictions of a 1.7 million barrel increase. In London Brent crude also rebounded on Wednesday to settle at $123.83 a barrel.
US gasoline stocks fell by 1.58 million barrels to 208 million, the lowest level since mid-November 2008. Gasoline futures rebounded to close at $3.27 a gallon, just 2 cents below the recent high set last week. So far higher gasoline prices do not seem to have had a significant effect on the demand for gasoline in the US which has remained around 9 million b/d over the last four weeks.
The price-drop on Monday was aided by S&P lowering its outlook for the US economy and another increase in Chinese bank reserve requirements. The stalemate in Libya, gradually increasing violence in several Middle Eastern countries, and general optimism about the prospects for US economic growth supported the rebound on Wednesday. Post-election riots in Nigeria added to concerns about the future of oil production in the country.
China’s Sinopec has halted export of oil products in the wake of reports that shortages of gasoline and diesel fuel are developing in the country. To fight inflation, Beijing has not increased domestic fuel prices sufficiently to compensate for the recent jump in the cost of imported crude. This left the smaller independent refiners, which are operating at a loss, to cut back on production. The large state-owned refiners are increasing production in April in an attempt to compensate. There are also reports that coal and drought-caused electricity shortages are developing in China which usually increases the demand for oil.
The revelation that the Saudi’s had cut oil production in March to 8.29 million b/d from 9.12 million in February due to an “oversupplied” market came as a shock despite the suggestion from the IEA last week that the Saudis were not producing as much as commonly thought. Surprisingly, the markets focused on the words “oversupplied” and not on the Saudis’ lack of compensation for lost Libyan production as they had been claiming. Some claim that the Saudis began producing 9 million b/d in November in response to Chinese demand and never did increase production due to events in Libya. Some or perhaps the entire Saudi production cut could, of course, be tied to the drop in Japanese demand following the earthquake. When Japanese demand resumes and EU refineries restart after maintenance, the global oil balance is going to get very tight unless the Saudis increase production. Some see a political motivation in the Saudi cutback.