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Spinning Iran's Falling Production

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Spinning Iran's Falling Production

Iran pulled a rabbit out of the hat today with their comments about cutting production. Their production has been falling because of lack of investment into new exploration, crumbling infrastructure and technology upgrades. Instead of admitting production could fall even further they spun the news into a suggestion they may cut production to save oil for future generations.

The news caused an immediate spike in oil prices to $126.97 intraday but the news was quickly denied by Iranian officials. They denied production cuts were imminent but said a reduction has been discussed. Either way the news had the desired result. Oil prices rose and Iran set the stage for the next announcement of lower production.

On a different front the International Energy Agency (IEA) said high prices were dampening demand for oil and petroleum products in the U.S. and Europe. The IEA cut its global oil demand growth forecast for this year to +1.2% from +1.5%. In the U.S. the IEA said demand for oil could drop as much as -2.1% while the demand for gasoline could drop by -1%.  The weekly MasterCard report said gasoline demand in the U.S. fell by 7% in the prior week. This report is normally slightly different that the EIA report due out tomorrow. The MasterCard report has been reflecting a larger drop in demand than the EIA by a factor of several percent. This is likely due to more cash purchases of gasoline now that credit cards balances are maxed out. Wal-Mart also reported that credit card usage had dropped and consumers were spending more cash on the payday cycles. 

There was also indecision on how much the earthquake in China that has already killed 12,000 people would cut demand in China. The area around the quake is home to 32 million people and thousands of businesses, factories and power plants have been closed for reasons relating to the quake.

In the U.S. the Senate voted to halt shipment of oil into the strategic petroleum reserve until the price of oil falls below $75. For the bill to become law the house also has to pass it and President Bush would have to sign it rather than veto it. This bill has zero chance of becoming a law. The term strategic petroleum reserve means just that. It is not an oil bank to help with high prices. It is insurance against something really unusual like Iran cutting production or Venezuela halting shipments to the U.S. because of sanctions for being a sponsor of terrorism. All of these things could happen any day and we need the maximum amount of oil in the reserve to help in times of real crisis.

Jim Brown

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