Oil prices opened and closed the week around $68 a barrel.  At one point they fell below $65 on news of a build in US crude stocks and later touched a high of over $70 on hopes that US unemployment was bottoming out. Oil’s connection to the dollar, equity markets, and hopes for an economic recovery remains strong.

Demand for oil remains weak, with US consumption of petroleum products falling to 17.7 million b/d, the lowest since May 1999. While gasoline demand this year has been relatively strong, distillate consumption, which is largely used for industrial purposes in the summer months, is down by nearly nine percent. Distillate stocks continue to grow and are now 34 percent higher than last year. In the meantime, OPEC production continues to creep back up as exporters take advantage of higher prices to ease their recent financial problems.

An oversupply of distillates in the US can be reduced through exports, provided world demand holds up, or they can be stored provided there is enough space. In the last two months, oil stored on tankers has jumped by 71 percent. Some distillate is now being held aboard newly built tankers that have not yet been used for crude.

Disagreement over the course of prices remains high.  Oil price bulls see the economic picture improving with prices moving higher by the end of the year and much higher over the next year or two. Last week Goldman Sachs sent prices surging with a forecast that oil would reach $85 by the end of the year. Most analysts, however, looking at falling demand and increasing stockpiles, expect prices to drop.

Many of the signs that the markets are choosing to interpret as a bottoming of the recession simply indicate a reduction in rates of decline and do not suggest that the demand for oil will increase in the foreseeable future. The Chinese say they are through filling their recently-built strategic reserve tanks and will not be in the market for oil to stockpile in the near future. Although Beijing is pumping large amounts of money into improving domestic infrastructure, it is difficult to see their exports increasing. US gasoline demand fell precipitously over the Memorial Day weekend, Japanese demand is down, and it is hard to imagine much growth in demand anywhere else.