Supply Fears Push Oil to Triple Digits
CLIFFORD KRAUSS / New York Times 20feb2008
See oil consumption/price graph below
HOUSTON — Crude oil closed above $100 a barrel for the first time Tuesday, vaulting through a longstanding psychological barrier amid persistent concern about whether production can keep up with rising global demand.
The day’s price rise of more than 4 percent capped a week-long run-up that began when President Hugo Chávez of Venezuela threatened to cut off oil exports to the United States over a legal struggle with Exxon Mobil. Crude oil fell from a record $100.10 a barrel in New York on speculation that a U.S. Energy Department report will show stockpiles rose for a sixth week, according to Reuters. Crude oil for March delivery dropped as much as 90 cents, or 0.9 percent, to $99.11 a barrel in after-hours electronic trading on the New York Mercantile Exchange.
Just as Mr. Chávez appeared to back off from his threats, an explosion at a Texas refinery on Monday reminded traders and hedge fund managers of the gasoline shortages and price increases that accompanied similar refinery failures last year. Even though the Alon USA refinery at Big Spring, Tex., was relatively small and American inventories are considered adequate, traders and hedge funds took the explosion as a buying signal.
“With this credit crisis going on, everyone is on edge and the slightest disruption in crude oil or its products takes prices right up,” said Michael Rose, director of the energy trading desk at Angus Jackson in Fort Lauderdale, Fla. “Prices are going to go higher before they go lower.”
Energy experts cited numerous underlying causes for the rise in energy prices, which have persisted despite a weakening American economy. American demand for gasoline has slipped about 50,000 barrels a day (out of total daily consumption of more than 20 million barrels) so far this year because of the slowing economy, but consumption in China, in India and in the oil-producing countries themselves continues to rise. Traders are also concerned about possible production cuts by the Organization of the Petroleum Exporting Countries.
World supplies have been trimmed by substantial cutbacks in production in Iraq and Nigeria in recent weeks. Nigeria alone has lost about 10 percent of its daily production since guerrillas stepped up their sabotage and kidnapping of oil workers in the Niger Delta at the end of last year. Some analysts fear that OPEC could cut production further when it meets next month to counter the prospect that a softening world economy may eventually weaken demand and push prices down.
Prices for the benchmark grade of oil, West Texas Intermediate crude, rose $4.51 to close at $100.01 on the New York Mercantile Exchange. The price rose as high as $100.10 in trading during the day, at least the third time this year that oil prices crossed the $100 barrier during a trading day. While $100.01 is the first close above $100 a barrel and a record in nominal terms, it is still shy of the inflation-adjusted record of $103.35, set in April 1980. (That number will be recalculated on Wednesday when the government releases new inflation data.)
United States stock prices were dragged down by the record oil close, which helped to reverse a 157-point rally in the Dow Jones industrial average, because investors feared that higher energy costs would further weaken consumer spending.
The average national price for unleaded regular gasoline, according to AAA, the automobile club, and the Oil Price Information Service, stands at $3.03 a gallon, compared with $3.02 a month ago and $2.26 a year ago. It usually takes at least a week for increases in oil prices to be reflected in gasoline prices.
“We’re looking at retail prices for regular unleaded of $3.50 to $3.75 in April and May,” said Tom Kloza, an analyst with Oil Price Information Service. “Those will be records.” The record of $3.22 a gallon was set last May.
Mr. Kloza also predicted record highs for diesel and jet fuel “within the next 90 days.”
Analysts say another factor causing the rise in oil prices is the falling value of the dollar. A depreciating dollar depresses investment by oil companies in developing fields because their salaries and other costs go up in local currencies as their earnings from dollar-denominated oil go down. It also encourages continued global consumption by shielding foreign buyers, whose currencies have been rising in relation to the dollar, from the full effect of price increases.
The falling dollar, along with declining credit and stock markets, also encourages traders to seek a safe haven in oil and other commodities.
“The way the markets look right now, with the dollar being weak against all currencies,” Mr. Rose of Angus Jackson said, “it’s prudent for traders and people in other countries to buy dollar-denominated products like grains and energy.”
The immediate cause that sent prices up today was the fire at the Texas refinery, energy experts said. The run-up, they said, was mostly psychological, since domestic supplies are considered ample to satisfy demand for the next several months.
“It served as a reminder to the market that major refinery mishaps are not necessarily just a memory,” said Adam Robinson, an energy analyst at Lehman Brothers.
The blast at the West Texas refinery, which caused four injuries, will halt processing of about 70,000 barrels a day for probably several weeks at least. The refinery provides gasoline to Fina service stations in Texas and the Southwest. A second refinery in Hawaii suffered a disruption over the weekend, but production was quickly restored.
Oil refineries across the country were plagued last year by a variety of breakdowns, including fires, power failures and leaks, that trimmed production during the spring and summer driving seasons.
The mishaps occurred as refiners were trying to meet a variety of new environmental regulations, add ethanol to their fuel mix and introduce fuels lower in sulfur, a pollutant. Energy experts say the refiners have taken steps to improve their performance this year, but there may be more incidents in the coming weeks as refineries go through routine maintenance and switch from producing winter blends to spring blends.
“It’s kind of like starting up your lawn mower after it’s been inactive for a while,” Mr. Kloza said. “It’s a little tricky.”
Following are the results of Thursday’s auction of 3- and 6-month Treasury bills:
(END of article as captured online)
Oil Rises Above $101 to Record on
Increased Demand, Rate Cuts
MARK SHENK / Bloomberg 20feb2008
Crude oil advanced to a record $101.32 barrel in New York on speculation U.S. interest rate cuts will bolster fuel consumption.
Federal Reserve Chairman Ben S. Bernanke has indicated the central bank will reduce U.S. interest rates if financial conditions and the availability of credit deteriorate. Rising world demand for raw materials helped send oil and commodities including soybeans and platinum to records this week.
"There are 100 reasons for prices to rise, because the market is tight," said Adam Sieminski, Deutsche Bank's chief energy economist in New York. "The only thing that will end this rally is a serious economic downturn. Demand is still expected to grow by more than 1 million barrels a day this year."
Crude oil for March delivery rose 73 cents, or 0.7 percent, to $100.74 a barrel at 2:50 p.m., a second consecutive record close above $100 on the New York Mercantile Exchange. Prices are up 74 percent from a year ago. The price of $101.32 reached today was the highest since oil futures began trading in 1983.
The March contract expired today. The more-active April contract closed at $99.70 a barrel, unchanged from yesterday.
"Part of the rally is related to the expiration of the March contract," said Phil Flynn, a senior trader at Alaron Trading Corp. in Chicago. "It's not unusual for a contract to rally or crash as it nears expiration. There are obviously a lot of people who need to cover shorts."
Shorts are bets that prices will decline.
Global oil demand will rise 1.7 million barrels a day to 87.6 million barrels a day this year, the International Energy Agency said in a monthly report on Feb. 13. The U.S. Energy Department and the Organization of Petroleum Exporting Countries also expect daily global consumption to rise by more than 1 million barrels this year.
"We should be looking at oil in the $120-to-$150 area by the end of the year without any major changes," said Peter Schiff, chief executive officer of Darien, Connecticut-based brokerage Euro Pacific Capital, which has $1 billion in customer accounts.
U.S. crude-oil stockpiles probably rose 2.3 million barrels last week, according to the median of 11 responses in a Bloomberg News survey. Supplies jumped 18.2 million barrels, or 6.4 percent, the previous five weeks. The Energy Department is scheduled to release its weekly report on inventories tomorrow at 10:30 a.m. in Washington.
"Once the report comes out tomorrow traders will probably start buying again, regardless of the numbers," said Peter Beutel, president of energy consultant Cameron Hanover Inc. in New Canaan, Connecticut.
Supplies of distillate fuels, a category that includes heating oil and diesel, fell 1.8 million barrels from 127 million the prior week, according to the survey. Gasoline supplies probably climbed 450,000 barrels from 229.2 million barrels.
Brent crude for April settlement fell 14 cents to close at $98.42 a barrel on London's ICE Futures Europe exchange. Futures reached $99.22 a barrel, the highest since trading began in 1988.
graphic source: 20feb2008