$100-plus oil and a slowing economy

While there are many disruptive, unresolved issues on the supply side that destabilize the markets none are supported by actions, as yet.
- We have not seen a rise in violence in the Niger Delta or the offshore as threatened by a militant group on reports of the death of its leader who is held in custody.
- Nor have we seen lack of crude availability to U.S. refiners driven by PDVSA threats to cut off oil sales to Exxon. In fact we would not expect to see such an action since the U.S. refiners that are geared to take Venezuelan crude oil are owned by Citgo, a PDVSA subsidiary, or are in joint ventures like the 50:50 owned(with Exxon), 186,160 b/d Chalmette refinery.
- An explosion and fire at Alon's 70,000 b/d Big Spring refinery temporarily shut operations. But the Big Spring refining capacity represents less than 0.4% of U.S. capacity and utilization is down to 83.5 percent while crude oil stocks across the country continue to build.
- Several of the more militant members of OPEC have speculated on production cuts preceding the organization’s next meeting on March 5. In spite of seasonal inventory builds in the U.S., there does not appear to be momentum for a production cut and we have not heard such talk from Saudi Arabia.

Similarly there are several unresolved issues on the demand side of the equation.
- China's economic growth continues to astound with a recently announced 11% year over year increase. Such economic growth and the associated growth in personal wealth implies increasing demand on transportation fuels. Recent consumption numbers support forecasts by IEA of a 2 million b/d global increase in 2008, but China policy makers have repeatedly attempted to contain the economic growth to a more sustainable level and slow the consumption growth.
- Economists and media continue to debate whether the economy is on the brink of a recession, in a recession or simply slowing temporarily. If the U.S. economy does slow or contract, demand will hold steady or decline slightly.
- The second quarter of every year has shown a decrease in global demand and an inventory build. During second quarters, prices typically are flat or declining.

But all of these demand issues were widely recognized before the price run-up. Consequently, the rapid price rise of the last two weeks is not driven by new demand concerns.

That leaves financial issues as the price driver. These include coverage of short positions as the prompt month rolls over this week; anticipation of another Fed rate cut which probably will lead to another currency exchange rate decline and oil price increases; and, more likely, a flight to commodities in the light of apparent increases in inflation rate.

Given the near immediate retracing of the price increase today, we can say that financial issues were to blame which have been resolved over the last 48 hours. Several distinguished industry watchers opined today that oil prices will fall from $100 to the mid-$80 per barrel in the second quarter, as we began advising last October.