After following the equity markets and the euro down on Monday and Tuesday, the oil markets reversed on Wednesday climbing 5.3 percent in NY to close at $79.68 and 3 percent in London to close at $102.73. Major impetus for the price reversal was an unexpected drop of 4.7 million barrels in US crude inventories vs. an anticipated gain of 1.5 million barrels. The move was supported by a rise in the equity markets and a pair of economic reports that were slightly better than expected.

Many analysts are skeptical that Wednesday’s reversal will hold, pointing out that the EU’s sovereign-debt crisis continues to worsen. Federal Reserve Chairman Bernanke made headlines by warning that the US economic recovery was “close to faltering” and called on the White House and Congress to take action.

There is no letup in the cascading problems of the EU with the euro hitting a 9-month low on Tuesday. The debt crisis is turning into a recession with new orders falling. The conventional wisdom is saying that Greece will be forced to default before the end of the year leading to a new round of troubles.

Goldman Sach’s has issued a report pointing out that the oil markets are still very tight and that global oil supply is still in a seasonally adjusted deficit, despite the releases from the strategic reserves. Crude inventories outside of the US are now down to the lowest level in nine years due mainly to the Libyan situation. Despite much talk about the imminent return of Libyan oil to the markets, little has happened as yet. Some Libyan fields are returning to production but at only a small fraction of pre-insurgency levels.

Goldman believes that OPEC’s effective spare capacity is less than 1 million b/d and that the likelihood of a recession in Europe is actually exacerbating tightness in the oil market. As oil prices fall in anticipation of lower demand they are now below the point necessary to balance supply and demand leading to further draws from inventory, backwardation, and a tighter physical market.

The IEA is pushing for the end of wasteful fuel subsidies in 37 countries. These countries spent $409 billion last year on fuel subsidies that maintain the political support of the beneficiaries. India has announced that it will limit subsidies to $8.1 billion this fiscal year.

Beijing reports that it is facing severe winter power shortages due to low water levels in south and central China.

The roughly 4 percent slump in US oil consumption this year has led to record exports of gasoline and other refined products, mainly to South America.