It was yet another wild ride for oil prices last week as the markets continued to balance unsettling economic news, Israel’s attack on Hamas in Gaza, and the pace of OPEC’s production cuts. Prices were up 8 percent on Monday as the Israeli attacks began, down on Tuesday on economic concerns, and took a 14 percent jump on Wednesday due to lower US refinery utilization, higher US demand, a massing of Israeli ground forces, and Moscow’s threats to cut the gas flow to Ukraine. Further gains after the markets reopened on Friday resulted in oil closing the week at $46.43, up 23 percent for the biggest one week gain since 1986.

Shortages in Europe from Russia’s reduction in the amount of gas supplied to Ukraine seem to be increasing.  Several East European countries are complaining that their supply is running 5 to 10 percent short of contract. On Sunday a major German gas distributor said that it supply from Russia was running short, but could be made up using Norwegian gas

There is no clear end to the Israeli incursion into Gaza which is likely to go on for some time, further inflaming passions across the Middle East. So far there is no immediate threat to oil supplies, but if the fighting is prolonged, pressure will increase on Middle Eastern governments to do something. At least one Iranian official has called for reduced oil sales to Israel’s backers as the only effective weapon the Arab world has. In the meantime, the fighting will exert upward pressure on oil prices in conjunction with OPEC’s production cuts.

The OPEC price cuts from mid-December seem to be taking hold. Tanker tracker Petrologistics reports that OPEC production was down by 400,000 b/d in December and most OPEC members have now announced how they will implement the 2.2 million b/d cut that was to begin on January 1st.  Numerous OPEC customers say they expect lower shipments in coming months. Even Iran joined in with the announcement of a 545,000 b/d cut.

New numbers and analysis of EIA data suggests that US oil demand, and particularly gasoline, may be rebounding slowly due to lower prices. The IEA says worldwide demand is no longer growing and may be slipping, but the IEA is not, as yet, talking about the 4 million b/d drop in demand that OPEC is attempting to offset. Although worldwide industrial production is clearly dropping rapidly due to the recession, there is as yet no clear picture as to how this drop translates into the demand for oil.