Supply and demand
After touching a recent high of nearly $83 a barrel in the middle of last week, a steady drop in oil prices was capped by a drop of $2.23, or 2.8 percent, on Wednesday to close at $78.02. A pessimistic outlook from the US Federal Reserve was behind much of the decline which sent the Dow down 265 points and the dollar higher, while investors scrambled for the safety of US government bonds. A statement from the Fed said “the pace of economic recovery is likely to be more modest in the near term than had been anticipated” – Fedspeak for “the situation is going downhill.” Considering that the headlines on Monday were saying that “oil was rising on optimism over US economic recovery,” we certainly are in volatile times.

The weekly US stocks report showed unexpected gains in gasoline and distillates, with crude inventories down 3 million barrels on lower imports. US refineries processing was down 3.1 percentage points last week.

In addition to the decline in US equity markets, analysts made a big fuss over “negative” economic news from China which reported a drop in industrial growth from 13.7 percent in June to “only” 13.4 percent in July – year over year. China’s purchases of crude in July fell to 18.8 million tons or 4.5 million b/d from a record high of 22.1 million in June, and only slightly below the 19.2 million tons that were imported in July 2009. Beijing, however, has been beset by major problems including a massive oil spill at an import terminal and serious flooding over large sections of the country.

Once again, the Kurds have blown up Iraq’s northern export pipeline to Ceyhan, Turkey.

IEA’s monthly Oil Market Report
The IEA is now forecasting that demand for oil will be 86.6 million b/d in 2011 and increase by 1.3 million b/d to 87.9 million in 2012. The agency does warn, however, that if economic recovery is not as strong as currently believed, then demand could fall to 86.3 million b/d in 2010 and 86.8 million b/d next year. The IEA sees global economic activity growing by 4.5 percent this year and 4.3 percent in 2011. The Agency notes, however, “that the global economic recovery may falter from the second half of 2010 to pose a significant downward risk to the forecast."

Global oil supplies are believed to have risen by 850,000 b/d in July to 87.2 million b/d. OPEC production increased by 220,000 b/d on higher output from Nigeria and the UAE. An increase of this size suggests that supplies will be plentiful for the immediate future. As has been the case for many months now, demand from China, India, and the oil exporters will be the key to global prices as demand from OECD countries will be stagnant at best.

Meanwhile, in Washington, the US’s EIA is forecasting that global demand will be 85.8 million b/d in 2010 and 87.3 million in 2011.