Prices and production
So far it has been an unusually volatile week for oil with prices falling from over $75 a barrel on Monday by nearly $4 and then rebounding Wednesday to close just below $74 a barrel. The Wednesday rebound came after reports showing larger-than-anticipated increases in US and Chinese manufacturing which in turn triggered a jump in the US equity markets of roughly 2.5 percent.

The fundamentals of oil supply and demand no longer seem to enter into the market’s calculus which jumps in either direction on bits of positive or negative news. This week’s stockpile report was decidedly negative. Total US stockpiles of crude climbed another 3.4 million barrels last week as compared to analysts’ expectations of a 1.2 million barrel increase. The EIA reported that US demand for gasoline in the last week of August fell to its lowest level since 2004.

After the close, US August auto sales were reported as being the worst in almost 30 years. The US private sector jobs report showing that 10,000 US jobs were lost in August as compared with an expected 19,000 job gain was ignored by the markets. This was the first fall in US private sector payrolls since January. If the 40,000 job gain in the US payrolls expected in the report due out on Friday turns out to be optimistic, Wednesday’s rebound could be short lived.

Iraq’s northern export pipeline to Ceyhan, Turkey which can carry 400,000 b/d is still out of service from a combination of sabotage, leaks and power problems. This is the third time the pipeline has been down in the past month. Last month Iraq’s export decrease of 70,000 b/d was the biggest drop of any OPEC member. Baghdad is still fuming over a contract the Kurds signed last week to supply the Germans with natural gas through the projected Nabucco pipeline. The government considers all such Kurdish deals as illegal.

China continues to grow
China’s manufacturing increased modestly in August after several months of contraction as the government implemented measures to rein in credit and slow housing speculation. Beijing also announced that passenger car sales rose 59 percent in August over 2009. While there is still trouble ahead, particularly the likely slowing of exports to the US, China’s GDP is still expected to grow by about 9 percent for the rest of 2010 and 2011.

India reported this week that its economy grew by 8.8 percent in the 2nd quarter as compared to last year. The New Delhi is trying to increase this to 10 percent. It seems clear that increasing demand for oil from Asia will be with us for a while.