Developments this week
Oil prices rose this week, continuing a rally that began in early October which has sent NY crude futures up by $20 a barrel and London by $16 a barrel. Wednesday was a particularly volatile day with prices first falling on concerns about European financial stability, then rising when the US weekly stocks report showed an unexpected drop in inventories, and finally falling again when interest on Italy’s 10-year bond surged to 7.6 percent. The Italian interest surge sent the equity markets into free fall along with the euro as interest rates at these levels suggests collapse of the Italian financial system is imminent. At close on Wednesday, NY oil was down $1.06 to close at $95.75 and London was down $2.69 to close at $112.51. The NY- London spread has narrowed markedly to $16.57 Wednesday from a record high of $27.88 on October 14th.
It is hard to overstate the degree of turmoil that is going on in Europe with the Greek and Italian prime ministers resigning and little agreement over successor governments in the offing. Germany is said to be making plans to shrink the Eurozone and the markets are suggesting that some sort of default/collapse is imminent. While all this should be sending oil prices lower as a faltering Europe will use less oil, every snatch of good news coming out of the turmoil seems to send oil prices higher.
The oil markets, however, may be tighter than is generally thought, as China is importing sizeable amounts of diesel. Platts reports that Libya is now producing 300,000 b/d of crude, but some of this is going to fill pipelines, storage tanks and to meet the needs of domestic refineries. Platts also reports lower Saudi production in October.
US distillate inventories are approaching the bottom of the normal range after dropping 6.2 million barrels last week. Total US commercial inventories were down by 15.3 million barrels – an unusually large number. US domestic gasoline consumption during the past month, however, was down by 5.6 percent from last year.
China’s inflation rate fell to 5.5 percent year-on-year during October, indicating that Beijing’s tight money policy is working and that economic growth with its higher oil consumption, rather than inflation fighting, will once again be the country’s top priority.
The release of the IAEA’s latest report on Iran’s alleged effort to build nuclear weapons has set off a new wave of charges, counter-charges and threats and counter threats. Israel is taking the lead by threatening to bomb Iran’s nuclear facilities. The US and EU are calling for harsher sanctions until Tehran fesses up as to just what it is doing. Russia and China are saying there is nothing new in the report and that Israel and the West are only making matters worse by threatening the Iranians. In the meantime, Tehran is denying everything and is threatening dire retaliation should anyone attack them.
To make matters worse, commentators already are talking about $200 oil if the situation deteriorates and some are talking about $300 or even $500 oil if the Straits of Hormuz and its 16 million b/d of crude shipments are ever closed.