Rise in oil prices has not slowed .Rise in oil prices has not slowed strong growth in consumption
By Jad Mouawad Published: July 31, 2007
NEW YORK: The great oil rally, now in its fourth year, shows no signs of slowing down.
On Tuesday, oil prices reached a record level, beating the peak from last summer. Light, sweet crude oil futures for September delivery rose to $77.93, up $1.10, a barrel on the New York Mercantile Exchange, compared with the previous high of $77.03 set in July 2006 at the onset of Israel's war in Lebanon.
Unlike the jump in prices last year, the gains on energy markets in the past few weeks have not been mainly caused by geopolitical tensions, although these have not disappeared in Iraq, Iran or Venezuela. Rather, the latest spike is the result of tighter market conditions this summer and concerns about insufficient supplies.
Oil prices have risen 26 percent since the beginning of the year. But that has not slowed down the strong growth in oil consumption, lifted by economic growth in the United States and Asia. Meanwhile, energy supplies have struggled to catch up, while a raft of outages at American refineries have crimped production at the busiest time of the year.
"The bottom line is the market has tightened up for good," said Jan Stuart, an energy economist at UBS. "From a crude oil fundamental perspective, we're not at the middle of the up-cycle yet. We've got ways to go."
Multimedia
Managing Globalization blog
» View
Today in Business
Guessing Murdoch's strategy for the JournalThe apex of a long career for Murdoch and his News Corp.Trade between India, Pakistan soars despite political disputes
Since the beginning of the year oil futures have risen following a spate of incidents and fires at refineries in the United States and elsewhere. There have also been production failures in Angola, Nigeria and the United Kingdom, and unexpected declines in oil production in Norway. Also, large projects have been delayed because of cost overruns.
All this has shaved critically needed oil supplies at a time when demand has been rising.
Global oil consumption is expected to reach 86 million barrels a day this year, 1.5 million barrels more than in 2006, according to the International Energy Agency, an adviser to industrialized countries.
Within five years, the energy agency sees demand reaching nearly 96 million barrels a day. In a recent report, it warned of a "supply crunch" if oil supplies fail to keep up with the pace of growth in demand.
The rise in oil consumption has been supported by a strong American economy. Last week, the Commerce Department said that the U.S. economy had expanded at an annual rate of 3.4 percent, faster than analysts had expected.
"It's a period of uncertainty," said Antoine Halff, an energy analyst at Fimat. "There are mixed signals on the oil market as there are in the broader economy. You have signs that the economy is resilient, and at the same time there are concerns about inflation and about the stock markets."
Referring to the oil market, Halff said, "There has been a very strong shift in market sentiment, everyone is bullish now."
The rising oil prices prompted a senior OPEC official to suggest that the oil cartel might act before its next scheduled meeting if prices reached $80 a barrel. The Organization of the Petroleum Exporting Countries, which control about 40 percent of global oil exports, next meets in Vienna on Sept. 11.
But OPEC's members appear divided over what to do next. The group's most hawkish members, like Iran or Venezuela, oppose any increase in OPEC's output. Iran's oil minister, Kazem Vaziri-Hamaneh, said Sunday that he did not expect that OPEC would consider changes to its output at its next meeting.
But Abdalla el-Badri, OPEC's secretary general, suggested Monday that OPEC could release some of its spare capacity to drive down prices.
"A price above $80 also wouldn't make us particularly pleased," Badri said in an interview published on Monday by an Austrian financial daily, Wirtschaftsblatt. "We're constantly monitoring the market and are therefore ready to adjust production if circumstances warrant this."
Badri estimated OPEC's untapped production level at 3.5 million barrels a day.
But few analysts believe OPEC has much capacity to act. The International Energy Agency estimates that OPEC's sustainable spare capacity is 2.8 million barrels a day, much of it in Saudi Arabia.
Even at the levels of today, oil futures are still about $10 a barrel short of the inflation-adjusted peak set in 1981. Oil prices would have to rise to about $90 a barrel to exceed that record level.
But that prospect does not seem so distant, or inconceivable, anymore.
Goldman Sachs analysts warned in a recent report that without swift action from OPEC's main country, Saudi Arabia, oil prices could rise above $90 a barrel this fall. They said that an increase in OPEC production could help push prices down by $5 to $10 a barrel. Other analysts also said the oil market has undergone a structural shift in recent weeks. After about four years when futures contracts were selling at a premium compared with spot prices, the market has recently shifted into 'backwardation," meaning that the price of oil for immediate delivery is now higher than futures prices.
"It is a very significant development, since it signals that there is a general tightness in the market," said Halff, the analyst at Fimat.
It also discourages refiners from building up stocks and forces them to draw on their inventories. That in turn adds to pressure on commercial oil stocks.
There was some surprise over the market's rapid gains this year.
Tom Bentz, a senior energy analyst at BNP Paribas, said he did not expect prices to rise so rapidly. Still, he expected to see futures rising as high as $90 a barrel by next year.
"This uptrend that has been in place since 1998 has not ended yet," Bentz said. "It's been nearly 10 years now in this bull market and we still have to see higher prices."