Despite the rebound from $69.81 on Thursday the current crude contract is facing its biggest two-week loss in months. January crude traded at $79.03 on December 1st making this week's drop to under $70 an 11% drop.
Prices were rebounding off Thursday's lows on reports of higher demand from China after their Industrial Production climbed +19.2% in November compared to November 2008. OPEC says it will increase shipments to China and supply them 100% of their long term contract amounts. That means no quote reductions to China. Saudi Arabia said it will ship 100% of China's orders even though that will put them well over their current quota.
Crude prices had fallen because of the monster spike in U.S. gasoline inventories to the highest level since April. The rebound is partly technical simply because of the severity of the decline. $70 is decent support for the January contract, which expires on Monday Dec-21st.
Light crude futures are also under pressure because of rising inventory levels at Cushing Oklahoma, the delivery point for light crude in the futures contracts. If there is no place to put oil there is going to be a desperation attempt to sell it rather than be faced with paying ultra high prices for short term storage.
China's crude oil processing volume rose to record levels in November due in part to the strong rebound China's seeing in its own economy. Refining volume rose +21% from 2008 levels to 8.1 million barrels per day. Gasoline production rose +11% from year ago levels. China is instituting a fuel pricing system to guarantee profits to refiners. In years past China set the price of gasoline and diesel low in order to promote the economy. When oil prices rose over $50 a barrel refiners were losing money because China did not want to raise prices for consumers and risk slowing down economic activity. There were long lines at gas stations and constant shortages because refiners would only make the minimum required by the government in order to lose less money.
OPEC members will meet again on Dec-22nd to discuss quotas and compliance with existing quotas. If Saudi Arabia has openly said they will violate the quota limit then odds are good it will be open season for producing every drop they can find. Most OPEC members have already said they support leaving the quotas intact at the current level but that does not mean they are not cheating. It is politically correct to maintain the party line about production cuts but it is a den of thieves when it comes to cheating on compliance with those same quotas.
Nearly every day there is some article talking about weak demand and the lack of a rebound in demand. However, it is only a matter of time before that demand does find some traction and when it does it could turn into a drag race rather than an afternoon drive.