‘Big Oil’ brakes supply to maintain gas prices

Oil prices slipped towards 70 dollars on Thursday, adding to sharp losses the previous day after government data showed rising crude and fuel inventories in the world's top oil consumer, the United States.

But, don't assume this translates into a corresponding drop in gas prices.

Crude supplies rose 1.1 million barrels last week in the US on LOWER refinery output, the Energy Information Administration said, compared to analyst forecasts of a decline. This took stocks 4.2 percent above this time last year.

"The crude build -- due to unexpectedly high imports -- was a surprise," said JPMorgan. "Gasoline demand eased as anticipated...this put demand on a year-on-year basis up an anemic 0.7 percent."

Too bad imports are steady.

The agreement to keep crude production steady, reached Thursday by OPEC oil ministers meeting in Caracas, will do little to ease prices

* * *

"Stock levels are on the high side, gasoline stocks are on the low side, and the market looks as though it's balanced," said Daukoru, who is also Nigeria's oil minister.

* * *

Qatari Oil Minister Abdullah al-Attiyah made clear that "at [$70 a barrel], OPEC won't cut production."

While high oil prices mean big profits for oil producers in the near term, the longer-term risk is that they could cause a drop-off in economic growth and spur the development of alternative energy sources.

Most OPEC members "don't want to send any signals to the market that there's a floor at $70," said Yasser Elguindi, senior managing director at Medley Global Advisors.

The cartel could face a more difficult decision in the second half of the year if inventories continue to build and global economic growth slows, said Michael Lynch, president of Winchester, Mass.-based Strategic Energy and Economic Research.

"That can really accelerate weakening prices," he said.

Which is happening now, though they blame it on Zarqawi as they do everything else.

As soon as gasoline demand started to wane because of high prices at the pump (coupled with relentless interest rate hikes), Big Oil reduced refinery output in order to limit gasoline price drops. This led to an 'unexpected' increase in crude supplies and subsequent drop in crude prices - which of course benefits traders.

The increase in crude supplies is "a surprise" because under ordinary competitive market forces, the larger crude supply could be utilized to compete for a greater share of a gasoline market whose demand is in large part limited by consumer ability to pay.

But, ours is no ordinary competitive market. Ours is an oligopoly, where Big Oil sets the price and our job is to pay.