Developments this week
The surge in oil prices that began last early week continued with Brent crude touching $113 a barrel on Wednesday before closing at $111.36. This week’s high, an increase of nearly $14 a barrel over last week’s lows, came mainly on expectations that some sort of settlement of the Eurozone’s sovereign debt problems will materialize. Although the equity and commodity markets are optimistic that a solution is in store, many observers remain skeptical that problems as deep and pervasive as the Eurozone crisis can be solved in the next few weeks.
A number of other factors affected the markets this week. The IEA announced that it was cutting its demand estimate for 2012 by 210,000 b/d due to slowing world growth. The Agency is estimating that Libyan oil production could rebound to 600,000 b/d by the end of the year but cautions that recovery to pre-uprising production levels may be slower due to damage and dissension with the ranks of the insurgency. The announcement that Tehran had hatched a plot to assassinate the Saudi Ambassador in Washington introduced yet another element into the Middle East situation as the US moves to further sanction Iran in retaliation. The euro and equity markets have been moving up, helping oil prices.
Oil prices in NY, where traders are less attuned to the EU crisis and Libyan oil production, remained relative quiet so far this week with prices hovering around $86 a barrel. The spread between London and NY oil widened again to $25.79 a barrel, only a dollar below the record high of $26.87 set on September 26th.
The IEA’s chief economist, Fatih Birol, told a conference in London that the OECD oil import bill for 2011 is close to that of 2008. The high oil prices that year are thought to have been a major contributing factor to the recession. Oil prices are once again close to the level which has historically caused recessions.
The Oil Market Report
The IEA’s monthly report is always the source of much new information and analysis about the state of the global oil situation. As could be expected, the IEA is now expecting growth in global GDP to be down a tad in 2011 and 2012, but warns that there are significant downside risks to this forecast. The drop in projected growth has led the Agency to forecast that demand next year will be down by 210,000 b/d next year.
Global oil production in September was down by 300,000 b/d from August. The IEA says that Saudi production probably fell by 200,000 b/d last month which is considerably less than the 400,000 b/d announced by the Saudi Oil Minister. Much of the 1 million b/d increase in Saudi oil production this summer was being burned in Saudi power plants for air conditioning and was never intended for export.
OECD stockpiles fell in August by 3.4 million barrels in contrast to the 14 million barrel increase which is normal for the month. Preliminary estimates say the stocks fell by another 12.7 million barrels in September. Total OECD stocks, however, are currently about 2.7 billion barrels so it will be a while before the drawdown becomes significant.