Thursday, October 25, 2007

Fuel Up Now: Oil is Over $90 Per Barrel!

Oil Tops $90 on Range of Worries

Tensions in the Mideast And Tightening SuppliesPush Crude Prices to Record

By NEIL KING JR. in Washington and SHAI OSTER in Beijing
October 26, 2007; Page A3; Wall Street Journal

Oil soared past $90 a barrel to a record on a mix of unsettling news that ranged from Middle East tensions to supply concerns, demonstrating the delicate state of world petroleum markets heading into the energy-intensive winter months.

The events -- which included a statement by a top OPEC official to The Wall Street Journal that the world's oil cartel doesn't see a need to check the price surge -- might not have moved oil markets dramatically by themselves. But oil's 3.9% rise yesterday to an exchange high of $90.46 a barrel shows that prices are responding to a slew of economic and geopolitical forces and suggests further big swings could lie ahead.

Abdalla Salem El-Badri, secretary-general of the Organization of Petroleum Exporting Countries, told the Journal yesterday the cartel isn't worried about prices hovering around $90 a barrel as long as global economic conditions are good.

"We have no price band or price target," Mr. El-Badri said on the sidelines of a meeting with Chinese energy officials in Beijing. "If it persists for a longer period, then we start worrying. But at this time, we don't know what's going to happen next month."

Traders have speculated that the group could announce another production increase when it meets in December, or even earlier at an OPEC heads-of-state summit in Saudi Arabia next month. Attention at those meetings will focus on Saudi Arabia, which takes the lead role in the cartel's decisions because it is the group's largest producer and the only member with major excess production capacity.

Iran, the world's third-largest oil exporter, also figured in yesterday's price action. Analysts said the rise in futures prices stemmed from a blend of geopolitical unease, including a new raft of sharp U.S. economic sanctions on Iran. Markets were also digesting a midweek U.S. government report that pointed to declining crude-oil supplies in the U.S., with particularly strong demand for scarce light, sweet crude, which is easier to refine into fuels like gasoline.

• The News: Oil prices hit another high, driven by tight supplies, Middle East jitters and concerns that OPEC may not be ready to boost output.

• The Big Question: All eyes now turn to whether oil -- already up about $40 a barrel this year -- could top $100, which is seen as a key psychological milestone.

• What's Next: So far the soaring prices have had a muted impact on the global economy, as well as on energy demand. But some oil-producing countries fear the U.S. could tip into recession, which could slacken the country's thirst for oil.

The market got its first nudge when reports broke that the Bush administration planned to slap economic sanctions on two prime components of Iran's military, as well as several of the country's top state-owned banks. The steps marked a ratcheting up of pressure from Washington and deepened fears that the Bush administration may be set on a path toward outright conflict with Iran over its nuclear program.

Then came the comments from OPEC's Mr. El-Badri, reported on yesterday, suggesting that the cartel didn't plan to step up production to add supplies to the world market.
Traders next reacted to a report from Oil Movements, a British company that monitors oil-tanker traffic in an effort to get around the secrecy of major oil exporters such as Saudi Arabia and Kuwait. The company's weekly report, which went out in the morning, said OPEC shipments for the first 10 days of November appeared to be "well below the October equivalents."

The report estimated that October OPEC shipments were likely to be about 300,000 barrels a day more than their September level, "but early indications for next month are that there may be nothing more to come." The world consumes more than 80 million barrels of oil a day, but a minor disruption can have an outsize effect because the margin between supply and demand has narrowed in recent years.

Adding to the turmoil, the Turkish government announced that it reserved the right to invade northern Iraq whenever it wanted, despite strong U.S. and Iraqi objections. The Turkish air force has been flying continuous bomber-jet sorties near the Iraqi border as tensions have risen over fighting between Turkish troops and Kurdish separatist guerillas in northern Iraq. Turkey is a primary conduit for oil shipments from Kirkuk, Iraq's main oil field in the north.

The Oil Movements report caused ripples in large part because it damped expectations that OPEC was going to boost oil shipments next month. OPEC, which produces about 40% of the world's oil, last month pledged to pump an additional 500,000 barrels a day as of Nov. 1 in a largely futile effort to check the rise in oil prices. So any hint that the promised increase may not actually happen was enough to spook an already tense petroleum market.

Some OPEC members, including Saudi Arabia, fear higher prices will damp demand for cartel oil. Others, such as Iran, would prefer to keep prices high. Mr. El-Badri said that there is plenty of oil available and that prices have been rising on political turmoil in the Middle East, and investors dumping equities and putting their money in oil futures.

The rise in oil prices still hasn't stopped the resilient U.S. economy. The average U.S. price for a gallon of regular gasoline stood at $2.82 yesterday, according to AAA. Despite oil's rise, that is up only one penny from the average price a month ago, due to smooth U.S. refinery runs and strong imports. But with winter on the way, November heating-oil futures yesterday went up 6.64 cents to settle at $2.4084 a gallon, an exchange record. (Oil prices remain below their record when adjusted for inflation of $101.70 a barrel reached in the spring of 1980 in the wake of the Iranian revolution.)

Historically, oil consumption rises during winter in the Northern Hemisphere because of its use as a heating fuel in many places. But according to the International Energy Agency, the Paris-based energy watchdog for Western countries, stocks fell 33 million barrels, or 360,000 barrels a day, between July and September. That contrasts with an average third-quarter increase in stocks of 280,000 barrels a day during the past five years.

The agency in August said the amount of oil in tanks had fallen below the five-year average to about 54 days of consumption.

"We're in an extremely tight supply situation," said Ann-Louise Hittle, a Wood Mackenzie oil-market analyst. That, she said, was giving credence to "peak oil theory" and the idea that supply won't be able to meet growing demand.

Oil analysts trace the current tightness in the market back to 2004, when China's energy-hungry economy pushed up oil demand by three million barrels a day. OPEC increased its production that year by three million barrels a day to meet increased demand, but that led to a collapse in the group's productive spare capacity, its traditional lever for influencing world oil prices.

This year, the situation has become worse. OPEC placed constraints on its production starting last November, driving up oil demand by 1.3 million barrels a day in 2007, according to Wood Mackenzie. Developed economies responded by drawing down their crude inventories, leading to more tightness in the market.

Now, the combination of record oil prices, falling home prices and the growing subprime-mortgage crisis have increased fears that the U.S. economy could possibly slip into recession.
Worries of a downturn in the U.S., both the world's largest economy and biggest energy consumer, have only deepened the sense of caution among some OPEC members, who must try to make the straddle between boosting supplies to tamp down prices while not sparking a precipitous fall in prices through oversupply.

OPEC ministers have complained in recent weeks that the latest price surge has little to do with fundamentals such as supply and demand. They argue that the price increase is driven more by market speculation, the falling U.S. dollar and refining bottlenecks.

--Guy Chazan in London contributed to this article

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