Prices and production
After falling steadily since the beginning of August, oil prices reversed on Wednesday and settled up 89 cents at $72.52. The reversal came despite an unusually large increase in US commercial petroleum stocks of nearly 9 million barrels last week. In normal times, an unanticipated stockpile increase of this size would be enough to send prices downwards, but these are not normal times. In recent weeks oil prices have been more attuned to the equity markets, which rose yesterday, than to the fundamentals of oil’s supply and demand.

With US demand essentially flat at 19.5 million b/d and little to no growth in the other OECD countries, the markets are focused on Chinese demand as the key to prices over the next year or so. After reviewing Beijing’s numbers Platts has concluded that apparent demand in China fell from a record high of 36.7 million tons in June to 35.8 million tons in July. This 5.6 percent drop is a reversal from the rapid increases in consumption that have been going on since February.

Most analysts attribute the drop to Beijing’s policy of economic tightening; however, floods, mudslides, and a massive fire and oil spill at a major import terminal may have played a part.

“Tightening” in China is different from that in most of the world in that GPD growth will likely slip to 9 or 10 percent from the 11 percent recorded in recent months. If so, the demand for oil will continue to grow at 5 percent or roughly 500,000 b/d in the coming year. China’s Petroleum and Chemical Industry Association is now forecasting a 5.8 percent increase in demand in the 2nd half while China National Petroleum Corp is forecasting a 9.5 percent increase.

The situation in Iraq continues to deteriorate, with more suicide bomb attacks at six locations scattered across the country and renewed demonstrations protesting power shortages. There is still no progress on forming a new government and responsibility for security is now almost entirely in Iraqi hands.

Concern in Her Majesty’s government?
The London Observer reported over the weekend that the British are starting to take the threat of peak oil seriously. The paper says the Department of Energy and Climate Change has sent out a letter asking for information and advice on what should be done to confront the threat of oil depletion.

The former British government had dismissed peak oil as alarmist; however, recently released documents show that various government agencies have been meeting to discuss the issue. In rejecting a freedom of information request for government papers on peak oil, the government says that some secrecy is necessary to ensure that the ministries can have a full and frank discussion of this sensitive issue. In the meantime, the official government position is that in accordance with the IEA’s current estimate, there will be sufficient oil to cover global needs for the next 20 years.