Developments this week
Several of the major factors affecting the oil markets these days, including the EU debt crisis, blockading the Straits of Hormuz, and OPEC production ceilings, came in play this week, making for three volatile days. The week opened with falling oil prices amid widespread skepticism that the EU’s plans for a closer fiscal union could be implemented in time to quell the crisis and prevent a major economic downturn. The pessimism continued on Tuesday as Moody’s reviewed the EU’s credit ratings and China’s export growth slowed markedly. The euro continues to fall against the dollar – hitting an 11-month low of $1.294 on Wednesday. Interest rates on Italy’s bonds increased on Wednesday and credit default swaps protecting sovereign debt in the EU are trading at record highs.
The release of the IEA’s monthly Oil Market Report added to the gloom with the Agency lowering its demand forecast for 2011 and 2012 by 0.2 million b/d. Many analysts are saying that the new forecasts including a 1.3 million b/d increase in demand next year is rather optimistic considering the pace at which economic troubles are accumulating in the EU and other nations.
Tuesday afternoon oil surged 3.6 percent after Iran’s state-run Fars news agency reported that Tehran was planning military maneuvers in the Strait of Hormuz. Iran’s Foreign Ministry quickly denied that Tehran planned to close the strait.
Wednesday was more an EU and OPEC day with the cartel deciding to hold output at 30 million b/d – somewhat below what is thought to be current output of 30.7 million b/d. The decision is being hailed as a victory for the Saudis in their disagreement with Tehran which was arguing for lower quotas and higher prices. The new OPEC policy, which is the first change in three years, does not set individual country quotas but does increase official OPEC production from 24 to 30 million b/d. Most OPEC states are already pumping pretty close to capacity. This decision coupled with more bad news from the EU led to a precipitous drop in oil prices on Wednesday with NY closing at $94.95 a barrel, down $5.19 for the day, and London closing at $105.02, down $4.48 for the day.
The weekly US stocks report showed crude dropping by 2 million barrels on lower imports but gasoline inventories increasing by 3.8 million barrels. This news sent NY gasoline futures tumbling to $2.50 a gallon, down 12 cents on Wednesday.
The decisions reached at the Durban conference on climate change are being called the biggest advance in controlling emissions since 1997. The breakthrough came when China and India agreed that they and the poorer countries had to control emissions too, instead of leaving most of the emissions cuts to the richer OECD nations. This change of policy may be due to the increasingly adverse weather that has been hitting many regions of the underdeveloped world and the realization that if they do nothing to control emissions until they are as rich per capita as the OECD nations; they may never achieve the goals of becoming rich one day too.