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1. Production and Prices

2. China

3. Iran's Production Cut

4. Energy Briefs

1. Production and Prices

In volatile trading, oil prices set a new record just shy of $128 a barrel last week before closing at a new high of $126.29 a barrel. Gasoline and heating oil futures also closed at new highs. Despite a new IEA monthly report forecasting that high prices will further lower demand in the OECD countries, worldwide demand led by China and the Middle East is still projected to grow by 1 million b/d during 2008. The IEA says world oil production fell by 400,000 b/d in April, largely caused by lower Russian output, the strike in the UK and pipeline sabotage in Nigeria. The EIA says US crude imports in March fell by 9.3 percent to an average of 9.38 million b/d.

While the IEA is still forecasting that production will meet demand for the rest of the year, the Agency notes there is a mismatch between spare world productive capacity of 2.3 million b/d, which consists largely of heavy oil, and the refining capacity to make use of this oil. During the week Iran said it may cut back because it is unable to sell all of its heavy oil production.

Observers are noting that the tight distillate supplies may be responsible for the current run-up in prices. Stockpiles in the developed countries are 6.7 percent lower than last year; however the US stock of distillates increased for the first time in many weeks as refiners concentrated on production of the more profitable diesel and heating oil.

There were a number of other developments affecting oil prices during the week. Goldman Sachs issued a forecast that crude will reach $135 a barrel in the third quarter of 2008 and $145 in the fourth quarter. President Bush, under pressure from a vote in Congress, halted additions to the US Strategic Petroleum Reserve and the Saudis announced that they would increase production by 300,000 b/d to 9.45 million b/d during June in order meet demand from US customers. While Goldmans forecast caused a stir, stopping additions to the SPR and the Saudi increase were widely dismissed as too little to affect prices.

2. China

Although the Sichuan earthquake seems unlikely to set back Chinas economic growth by very much, the disaster may have a noticeable impact on Chinas energy supply and imports of coal and oil. The area subjected to the quake produces about 22 percent of Chinas natural gas supplies and contains many coal mines and hydro-electric dams which generated about 62 percent of the provinces total electricity production. Many of the 396 power stations on the river system and their dams were damaged. Several major reservoirs are being drained to prevent their dams from failing. Beijing ordered coal mines, oil and gas wells, and chemical plants affected by the quake to shut down until the situation could be assessed. Twenty-two coal mines in Sichuan, Chongqing and Gansu provinces were affected by the quake.

Loss of significant amounts of natural gas, coal, and electricity production for an indefinite period suggests that China will have to step up imports of coal and oil products. Already some 700,000 barrels of emergency fuel supplies have been dispatched to the area.

Prior to the earthquake, Chinas crude and oil products imports were already increasing rapidly. Crude imports in the first 4 months of 2008 were up 9.8 percent over 2007 to support an increase in industrial production of 15.7 percent in April. Diesel imports in April rose to 520,000 tons from 30,000 tons a year earlier and 490,000 tons in March. Traders say that China is planning to import still more oil in May and June to prepare for the Olympics and to support recovery from the earthquake. No let-up to Chinese demand for oil is yet in sight, suggesting that world prices will continue to move higher during the summer.