Supply and demand

Oil prices fluctuated between $75 and $76 a barrel until the American Petroleum Institute released their report Tuesday evening showing that US crude stocks had increased by nearly 6 million barrels last week. This news sent prices falling below $74 on Wednesday morning. When the EIA’s weekly and better based stocks report was released Wednesday morning showing that crude stocks had actually declined by 800,000 barrels, the markets reversed to close at $75.42. Despite the correction, the EIA report still showed that US oil stockpiles are at the highest level in 27 years. When combined with concerns about the course of the global economy, the markets are concerned that there will be too much oil supply available for the foreseeable future. In general the oil markets continue to move in step with the equity markets rather than following inventory and supply/demand signals.

A contrary opinion is held by analysts and Goldman Sachs who note that in the past two months crude inventories stored on tankers has fallen by some 40-50 million barrels to an 18-month low, more than offsetting the onshore crude buildup. Goldman Sachs believes that demand for oil exceeded supply by 600,000 b/d in June and July resulting in the drawdown of oil stored on tankers. The analysts expect that demand for oil will increase in the second half of 2010, leading to $85-$95 a barrel oil.

Iran continues to defy UN sanctions by announcing that it will build new nuclear enrichment sites. Beijing approved another 24 electric power plants as China’s electricity consumption continues to set records.

The US Interior Department will restrict the use of categorical exclusions as it moves to tighten offshore drilling regulations.

President Medvedev has called on world leaders to take action to fight against global warming in the wake of the unprecedented heat wave that continues to ravage Russia. Moscow is starting to get the message that global warming can be dangerous and is likely attributable, at least in part, to anthropogenic climate change.

Iraq

Baghdad too is engulfed in a heat wave which has sent day time temperatures to 120ºF (40ºC) and is sending the demand for electricity to new highs, although the electric grid can only provide a fraction of the necessary power. The demand for gasoline and diesel to power home generators has led to fuel shortages across Baghdad. The government has banned public protests against electricity shortages and has deployed security to prevent crowds from forming. In the meantime a suicide bomber killed 45 and wounded 129 men lined up to join the Army.

The political situation in Iraq is far from stable. It has been five months since the elections and the country is still not able to form a new government. With US combat forces about to complete their withdrawl, the chances that the country will be able to achieve a substantial increase in its oil production looks increasingly tenuous.