Well for a day or so in the oil patch, it sure felt like it. A global uptick in manufacturing drove oil as fears and safe haven talk was so last month. A full fledged commodity craze is back as traders shun the safety of the dollar for the possibility of more appetizing risk. A big leap in the ISM manufacturing number following strong numbers in China and Europe created a surge across the commodities complex and demolished the greenback. Risk is cool once again and the dollar is not worth the paper it is printed on. This puts the Fed back in a tough spot as it will have to find the right balance of growth versus damaging commodity price inflation. The pressures are becoming so great that it was reported that Treasury Secretary Geithner became an expletive mouth. Good news is good as long as it is not good enough to stoke commodity inflation fear and force the Fed out of its simulative game plan.
Still today the market will have to face once again the realities of or current supply and the possibility that a surge in oil price may slow the economic recovery. The American Petroleum Institute weekly supply report comes out today and the Department of Energy report tomorrow. Bloomberg News survey says that U.S. crude-oil inventories probably increased as refineries reduced operating rates and imports arrived near the year's high. Bloomberg points out that oil stockpiles climbed 5.2 million barrels in the week ended July 24, the biggest increase since April, the Energy Department reported last week. Crude-oil imports jumped 8.9 percent to 10 million barrels a day that week, the highest since January. This week they expect an increase of 1.05 million barrels. Gasoline inventories probably fell 1.7 million barrels according to the survey and distillates increased by 1.15 million barrels.
And oil bulls have other worries as well. Can a rebounding economy survive higher prices? The weak dollar may shield Europe from higher prices yet the US will feel a double whammy. The Financial Times reports that Fatih Birol of the International Energy Agency said the world economy cannot sustain any further rise in the oil price. Mr. Birol said that price higher than about $70 could dampen a world economic recovery. In fact Mr. Birol says that, "If we go one step further, if we see prices go much higher than that, we may see it slow down and strangle economic recovery."
Well it looks like the debate over drilling for oil in the Gulf of Mexico has been decided! Cuba will let Russia drill. What? I know! That's right. Reuter's news reports that, "Russia and Cuba have signed contracts that "set the bases" for Russian oil company Zarubezhneft to search for oil in Cuba's part of the Gulf of Mexico", Cuba's state-run press said on Wednesday. In its online edition, Communist Party newspaper Granma said four oil-related contracts had been signed during a visit on Tuesday by Russian Deputy Prime Minister Igor Sechin to the island that was his country's close ally during the Cold War. Granma, without providing details, said the oil pacts between Zarubezhneft and state-owned Cuba Petroleo, "set the bases for work in (Cuba's) exclusive economic zone in the gulf." Reuters' says also that Cuba has said it may have 20 billion barrels of oil reserves in its offshore fields, but only one test well has been drilled. Nancy Pelosi is going to be not pleased when she hears about this. Now the next question is whether or not the Fed will care!
And then you have OPEC. You all remember OPEC don't you? Bloomberg News says that the Organization of Petroleum Exporting Countries increased oil output for a fourth straight month in July, reducing compliance with quotas as some members took advantage of rising prices. A Bloomberg News survey showed that OPEC oil output averaged 28.39 million barrels a day last month, up 45,000 from June, according to the survey of oil companies, producers and analysts. The 11 OPEC members with quotas, all except Iraq, pumped 26.035 million barrels a day, 1.19 million more than their target.
Republished with permission from Alaron's Energy Report Daily.