Gaza, OPEC production cuts, and the gas shutoff to Europe competing with an avalanche of bad economic news for control of oil prices. At the end, the bad economic news won with crude falling below $40 on Friday after having been above $50 on Tuesday. The week was highlighted by a 12 percent price drop on Wednesday, the biggest in seven years.

While US stockpiles continue to build, oil for November 2009 delivery is still trading at $17 a barrel over the front month. So long as there is surplus oil on the market, speculators will continue to buy oil and store it for future delivery. Inventories at Cushing, Okla, the largest US commercial storage hub, are at a record high and there are reports that an additional 10 supertankers have been chartered to store oil until fall.

US refining operations remain at a relatively low level with imports of gasoline making up the difference. Despite the deteriorating economy, US demand for petroleum products continued to creep up due to low prices and is now only about 500,000 b/d lower than during the previous 4 week period last year. Gasoline demand is only down by 200,000 b/d; however some of the rebound is likely due to the holiday season.

As oil traders are now chartering relatively expensive supertankers to hold the excess oil for later delivery, it is clear that there is an oversupply of crude at present. Last week US crude inventories built at the rate of nearly 1 million b/d as speculators took advantage of current prices to fill every available tank. Governments with strategic reserves are starting to purchase crude. The US is adding 180,000 b/d to its reserve and China is reported to have started purchases too. 

The size of the demand for crude and whether it is contracting due to deteriorating economic conditions or increasing once again due to relatively low prices will be the key issue during the next few months. Now that OPEC appears willing to be making actual production cuts, price action over the next few months should give a better insight into the state of worldwide demand.