Oil Climbs to Record as Demand Strains World Production System
June 20 (Bloomberg) -- Crude oil jumped to a record above $59 a barrel in New York as soaring demand in Asia and North America stretched the ability of OPEC and refiners to keep pace.
Oil has averaged about $51 so far this year compared with about $37 in the same period of 2004. Rising prices have done little to slow consumption, which is forecast to grow more than 2 percent in 2005 for a second straight year. With OPEC pumping at capacity and demand set to surge in the fourth quarter, consumers lack a buffer to cope with supply interruptions.
``The market perceives that some of the demand has to be shaved off to balance with supply,'' said Tor Kartevold, an oil analyst at Statoil ASA, Norway's largest oil company. ``It all depends on economic growth. When both refining and crude production are at full capacity, the market is very sensitive to supply disruptions.''
Crude oil rose as much as 76 cents, or 1.3 percent, to $59.23, the highest price since the contract was introduced on the New York Mercantile Exchange in 1983. It gained 43 cents at 11:49 a.m. London time, 57 percent higher than a year ago.
``There will be no pain in the global economy until oil rises to $65 or higher,'' said Deborah White, an economist at Societe Generale SA in Paris, who says prices could reach $60 as soon as this week. ``It's economic growth that's boosted prices,'' which ``aren't hurting U.S. consumers,'' she said.
Brent crude for August settlement reached $58.58 a barrel on London's International Petroleum Exchange, the highest price since oil started trading on the IPE in 1988. It gained 48 cents to $58.24 at 11:49 a.m.
Record Profits
Because of high prices, Exxon Mobil Corp., BP Plc, Royal Dutch/Shell Group, Chevron Corp. and Total SA, the five largest publicly traded oil companies, last year reported net income of about $85 billion.
International oil companies ``are reluctant to spend what they view as shareholders' money to increase production,'' White of Societe Generale said.
Oil prices are still lower than they were in the 1970s, adjusted for inflation. Prices surged in 1974 after an oil embargo that followed the Arab-Israeli war, then from 1979 through 1981, after the revolution in Iran. The average cost of oil used by U.S. refiners was $35.24 a barrel in 1981, according to the Energy Department, or $75.44 in today's dollars.
Pumping Hard
As the source of about 40 percent of the world's oil, the Organization of Petroleum Exporting Countries is already pumping more than targeted and close to capacity. OPEC agreed last week to raise output quotas by 500,000 barrels a day to a record 28 million a day with an option to boost them again by the same amount if needed.
For the market, last week's decision was ``a demonstration that OPEC can't do anything,'' Statoil's Kartevold said.
OPEC's spare capacity, almost entirely held by Saudi Arabia, its largest and most influential member, is for production of sour types of crude oil that are more difficult to process into heating oil or gasoline because of their high content of sulfur.
``The problem is that the fields that produce the quality of crude that refiners need are in decline,'' Societe Generale's White said. ``There's a shortage of refining capacity and there's a shortage of the simplest crude to refine.''
Most refiners prefer so-called sweeter crude because of its lower sulfur content. No new refineries have been built in about 30 years in the U.S. and about a decade in Europe, straining the industrialized world's ability to produce enough fuels.
Gasoline Demand
U.S. gasoline demand jumped to 9.53 million barrels a day the week ended June 10, its highest in almost two years and the third-highest level on record, according to the Energy Department. U.S. refineries operated at 96.7 percent of capacity the week ended June 10.
Supplies of U.S. distillates, which include heating oil and diesel, have remained lower than average all this year even after refiners increased production. Demand for such fuels is set to peak in the fourth quarter, when the International Energy Agency estimates the world will need 86.4 million barrels of oil a day.
U.S. refiners in the second quarter, when demand slows, fix and improve refineries for fuel production in preparation for the summer peak in gasoline demand and the winter surge in heating- fuel consumption. This year, refiners may be better prepared to process the sour grades of crude, Goldman, Sachs & Co. commodities strategists, led by Steve Strongin in New York and Jeffrey Currie in London, said in a report today.
``The extended refinery maintenance cycle this spring, especially during a period of robust refining margins, suggests maintenance focused on improving yields and the ability to handle a heavier and more sour crude slate,'' the Goldman report said.
China, which has led global oil demand growth for the past three years and surpassed Japan as the world's second-largest consumer after the U.S., last week reported a bigger-than- expected increase in industrial output for May, prompting JPMorgan & Chase Co. to raise its growth forecast for the nation.
``The only thing that will stop prices going up is for them to rise to the point where they start hurting the economy,'' said Gal Luft, executive director of the Washington-based Institute for the Analysis of Global Security. ``The question is: How high should oil prices rise before they slow down China and India?''
To contact the reporter on this story:
Alejandro Barbajosa in London at
abarbajosa@bloomberg.net
Last Updated: June 20, 2005 07:08 EDT