Starting the week at $68 a barrel, oil traded as high as $73 before closing out the week at $72.04. Once again the increase was mostly based on financial developments – a falling dollar, fears of inflation, and hopes for an economic rebound.  However, the IEA did reduce its estimate of how much demand will fall in 2009 by 120,000 b/d, US crude inventories fell by 4.4 million barrels, and China reported a jump in industrial production.

In its monthly oil market report, the IEA now forecasts that global demand in 2009 will be 83.3 million b/d, down 2.5 million b/d from 2008. OPEC crude production in May was up by 160,000 b/d, leaving the organization about 1.1 million b/d over its target output. OECD stockpiles rose by 10.4 million barrels in April and are now 7.5 percent above last year.

Iraq, which is not subject to OPEC restrictions, increased its exports to 2.4 million b/d, the highest since the 2003 invasion. Much of the increase is coming from the Kirkuk oil fields and is being exported through Turkey.

Increasing US gasoline prices are again raising fears of damage to an economic rebound. The nationwide price for regular is now $2.66 and just a hair below $3 in California. There is little indication that Americans are substantially curtailing their driving despite the additional $400 million per day the gas price increase since last December is costing them. While distillate (largely diesel) consumption is down by 8.4 percent this year over 2008, gasoline consumption over the last four weeks is down by only 0.4 percent. Given that some of the reduction in gasoline consumption must be related to decreased economic activity, the figures suggest that personal travel must still be close to last year’s level. Analysts are split as to how high oil prices have to go before economic consequences become starkly evident. Some say $80 a barrel, some say $100, and some say $125. At any rate tens of billions of additional dollars are going for gasoline in the US each month rather than to other purchases.

The balance between higher and lower oil prices is unusually cloudy. Most analysts are saying that $70 for oil is much too high given the economic outlook in the OECD countries right now. Others point to the unprecedented deficits that governments are financing and believe that inflation-fearful investors will continue to buy oil as one of the few safe havens; and many believe that an economic rebound, that will increase the demand for oil, is only months away.