Developments this week
After a quiet Monday and Tuesday during which oil prices in NY slid to below $98 a barrel on expectations that OPEC would raise production quotas on Wednesday, it came as a shock when OPEC failed to reach agreement. Oil futures in NY immediately jumped to a close of $100.74 and in London Brent closed at $117.85, the highest since the sell-off from $126 in early May. The spread between NY and London futures set a record by settling at $17.69 on Tuesday.
After the OPEC meeting Saudi Oil Minister al-Naimi told the reporters that “it was one of the worst meetings we’ve ever had, we were unable to reach an agreement.” Al Naimi said that Saudi Arabia together with Kuwait, Qatar, and the UAE were ready to increase production by 1.5 million b/d. Libya, Angola, Ecuador, Algeria, Iran, and Venezuela were opposed to the increase which would have increased OPEC’s output from the current 28.8 million b/d to 30.3 million b/d. From the opponents listed by al Naimi, it is easy to see that those countries already producing at full capacity are not interested in in seeing the Saudis and their friends do anything to keep prices from rising further.
On Tuesday the EIA said that it expects global demand to increase to 89.18 million b/d in the third quarter. The IEA in Paris lowered its demand estimate last month due to high prices and slowing economic growth, but still says it will hit 89.2 million b/d for this year and higher in the last half.
The formal OPEC quotas have been widely ignored for some time now with many OPEC members producing all they can and the Saudis varying thire output for political, economic, and possibly even geologic reasons. Saudi production was reported to be considerably higher in May, although some observers believe that much of the increase went for domestic electricity generation. After the OPEC meeting the Saudi oil minister announced that his country is ready to supply whatever the market demands. Gulf sources are already saying that the Saudis plan to increase output to 10 million b/d from what is said to be currently 9 million b/d.
A second surprise of the week occurred when first the API and then the EAI reported that US crude inventories had undergone a major decline last week. US crude imports last week were down by nearly 900,000 b/d, pulling the crude stock down by 4.8 million barrels. It is difficult for outsiders to tell if a major drop in imports is due to ship schedules or oil buyers have trouble finding crude to import in a tight market.
US gasoline stocks increased by 2.2 million barrels as refineries operated at a relatively strong 87.2 percent of capacity, and demand for gasoline dropped 2.9 percent according to MasterCard.
Elsewhere fuel and electricity shortages continue across Pakistan as do riots protesting same. Blackouts and fuel shortages continue in various African countries. After months of drought, southern China is now having floods as some of the heaviest rains in the last 200 years have fallen on parts of the region. Mongolia is out of diesel and is cutting back on rail service while awaiting shipments from Russia and China, both of which have announced a ban on exporting fuel.