Prices and production
Optimism that the recession will soon be reaching the bottom sent oil prices still higher this week. The July contract touched $63.82 Wednesday afternoon and closed at $63.45. As has been the case for many weeks there has been no solid economic or oil market news to support the increase. The US stocks report this week was delayed until Thursday due to the holiday, but analysts are predicting another decline in crude inventories.
Fighting between government forces and the militants continues in Nigeria. Attacks on key pipelines over the weekend shut in another 100,000 b/d of oil and may force the closure of the country’s largest oil refinery. Russia’s Oil Minister said that his country’s oil production in 2009 would be about the same as in 2008 rather than falling as was predicted earlier.
OPEC meets in Vienna today and is expected to leave production goals unchanged while calling for better adherence to the existing quotas. Saudi Oil Minister al Naimi expects oil prices to reach $75 a barrel by the end of the year and believes that the global economy will be strong enough by then to cope with $75-80 oil. Naimi said that higher Chinese consumption will soon force prices higher.
Most observers of the oil markets are not as optimistic as the Saudi Minister. They note that demand for oil continues to fall and as yet there is no solid evidence of an economic rebound. Beijing went out of its way this week to explain that a 3.6 percent drop in electricity production was not indicative of China’s GDP which it maintains is growing at 6 percent. ConocoPhillips expects that oil supply will exceed demand in 2009 and for the next several years. Japan’s Petroleum Association sees prices back at $40-50 by summer.
Warnings
The International Energy Agency is taking every opportunity to warn that the recession-induced drop in investment will have serious consequences when an economic rebound actually begins. In support of the G-8 Energy Ministers meeting over the weekend, the Agency prepared a briefing paper warning of major cutbacks in oil, natural gas, electricity, renewables and coal projects. For the oil industry, the IEA identified 20 major projects costing $170 billion intended to produce 2 million b/d that have been delayed or cancelled. In addition, much drilling to sustain output at existing fields has been halted.
McKinsey & Company issued a new report arguing that an oil price spike as early as 2010 is inevitable assuming the current economic downturn is a moderate one. If the downturn becomes “very severe,” the price surge could be delayed to 2013.
Detroit
All indications are that GM will go into bankruptcy in the next few days. The Chrysler bankruptcy is moving along quickly with the judge overruling all objections. The reorganization is expected to be finished up shortly. Early indications say that Chrysler’s sales held up during the bankruptcy.
