Starting in the vicinity of $60 a barrel on Monday, oil prices closed at $63.56 on Friday for an increase of 6 percent — after falling more than 10 percent the week before. There was little oil-related news behind the rally. Increased profits at two Wall Street firms lifted the stock markets. A weaker dollar, signs that China may be recovering, and a slightly optimistic Federal Reserve report contributed to the price rise.
Demand for oil products in the US and other OECD countries remains weak. Average OECD oil use during April was down by over 3 million b/d as compared to 2007. The American Petroleum Institute reported that total product deliveries in the US during the first half averaged 18.75 million b/d which is 5.8 percent lower than in 2008 and nearly 10 percent lower than the peak of 20.75 million b/d in the first half of 2005. The EIA reports US consumption is now running about 18.4 million b/d, down about 6.1 percent compared with last year. Most of the drop continues to be in diesel and jet fuel while gasoline consumption is down by only 0.6 percent as compared with last year.
It remains difficult to determine how much production has been shut-in by insurgent attacks in Nigeria as the government generally forbids the oil companies from confirming successful militant attacks. We do know that seven Nigerian crude streams are not producing contractual quantities and are under force majeure. Some of the problem may be due to attacks on facilities and pipelines supplying natural gas to Nigeria’s power stations. One local newspaper is reporting that total power generation is now down to 900 megawatts as compared to the 6000 megawatts that the government had planned to be producing this year. Power shortages anywhere near this size may be causing significant disruptions to the nation’s economy and oil production.
Longtime students of the oil market are of mixed minds as to where oil prices are going. A University of Calgary professor believes oil supply is still outpacing demand by 1 million b/d so that as soon as all available oil storage tanks are filled, prices will collapse to $20 a barrel. Others who agree with the over-supply thesis see oil falling to last winter’s $40 a barrel.
At the other end of the scale are Morgan Stanley analysts who forecast last week that oil prices will average $85 a barrel during 2010 due to an economic revival that will lift demand by 1.4 million b/d coupled with falling OPEC and non-OPEC production.