Engineering News

Snubbing Saudi Plans, Oil Prices Climb Anew
Thursday, July 03, 2008

Oil markets are dealing a stunning blow to Saudi-led efforts to calm down prices with assurances of future supplies.

Prices set a record above $144 a barrel on Wednesday, a gain of more than $13 a barrel, or more than 10%, from June 9, when Saudi Arabia's King Abdullah first called for a producer-consumer summit.

Oil prices whipsawed on optimistic trial balloons of Saudi output rising to 10 million barrels a day - a generational high - only to have the short-term increases scaled back to around 9.7 million barrels a day this month after the June 22 talks in Jeddah.

Ali Naimi, the oil minister once dubbed the "Saud of silence" for his reluctance to shed light on the kingdom's oil policy, has been on a media campaign of late. "We can pump 11 million (barrels a day) sustainably for a long, long time," Naimi said at an industry conference in Madrid this week, yet prices ran up above $140 a barrel.

The problem for the Saudis and others trying to corral oil prices is that when the market focuses on the Middle East these days its with a nervous eye over increasingly tense Iranian-Israeli relations, not Saudi oil flows. Thickening the stew was a report from veteran journalist Seymour Hersh that the U.S. has stepped up secret operations inside Iran.

In comments to Kuwait's Arab Times newspaper Tuesday, the Saudi king repeated that speculators and high taxes in consumer countries are behind record-high prices, not a lack of supply.

The king sounded a note of exasperation and gave little solace for any near-term relief from prices.

"People who think that oil prices will go down once production is raised are wrong because there are indications the prices will remain high," the king was quoted as saying, without elaboration.

IEA's Bullish Outlook

The market found its own indication of likely higher prices, though, in the International Energy Agency's near-term outlook projecting a tightening oil market in the next five years, with the Organization of Petroleum Exporting Countries holding "negligible" spare capacity and "minimal" non-OPEC supply growth between by 2013.

The message from the IEA, the West's energy watchdog, seems to be the situation will get a lot worse before it gets better. With a practical, but hard-to-take poke in the eye, IEA said current oil prices accurately reflect fundamentals and cautioned that the economic downturn in the U.S. - the world's largest oil consumer - will last at least until 2010.

Some pundits, playing on IEA's past undue optimism and repeated downward revisions on supply/demand projections, worry that the situation may be even worse if the IEA is sounding alarmed.

The five-year outlook to 2013 strikes an ironic chord in the market. The cheapest price for any crude oil futures contract on Nymex on Wednesday was $139.92 a barrel, for delivery in February to May 2013. That's the highest-ever cheapest price on Nymex and is higher than the front-month price traded less than a week ago.

Nymex crude for August delivery hit an intraday record of $144.15 a barrel Wednesday and settled at a record $143.57 a barrel, up 2%, or $2.60.

Gasoline futures set a record at $3.5494 a gallon, up 3.6 cents, or 1%, while heating oil futures also settled at a record, rising 3.2%, or 12.8c, to $4.0715 a gallon.

Heating oil futures topped $4 a gallon in each month through May 2010 on Wednesday, with prices for the upcoming October 2008-March 2009 winter season averaging above $4.20 a gallon. That's well above record-high residential prices for heating oil last winter.

US Crude Stocks Shrinking

A spark for Wednesday's runup came from weekly U.S. oil inventory data showing crude stocks fell by 2 million barrels against expectations of a modest rise. The year-to-year gap in crude stocks blew out to 15.3%, or 54.1 million barrels, the biggest shortfall since March 2003.

U.S. crude oil stocks of 299.8 million barrels are sufficient to cover 19.5 days of current refinery demand, down from 22.8 days a year ago and below the five-year average of 20.3 days, data from the Energy Information Administration show. Record high crude and products prices yield weak margins for refiners and the front-month discount in crude futures prices isn't enough to pay for stockbuilding, encouraging a hand-to-mouth existence in the current nervous market. Refiners also don't want to be holding bloated stocks if prices suddenly turn south. But the greatest risk still appears to be on the upside as prices climb amid bleak demand indications.

Although weekly data showed U.S. oil demand at its highest level since May 2, the EIA numbers for most of June suggest a fall of nearly 400,000 barrels a day in the month. At 20.342 million barrels a day, four-week demand through June 27 is on track to be the lowest level in June since 2003. June demand is running 1.4% below the 20.64 million barrels a day level forecast by the EIA in its Short-Term Energy Outlook on June 10. The next monthly update is due July 8.

Year-to-date EIA data show demand running 2.6%, or nearly 550,000 barrels a day, lower than a year ago, at 20.7 million barrels a day. That would be the biggest decline in the first six months of the year since 1991, EIA data show.

Demand for gasoline so far this year is down 1.1%, at a shade over 9.1 million barrels a day, which would be the lowest level since 2004. Both this year, and back then, average retail prices of regular gasoline were running one-third higher than the previous year.

While strength in U.S. oil demand is very much a relative term, June's decline is a slowdown from the 811,000 barrels a day drop shown in revised April data released Monday by EIA. In the first four months of 2008, EIA data show U.S. demand fell by 4.2%, or nearly 900,000 barrels a day, from a year earlier.

Still oil prices march higher on the strength of demand from China, the world's second-largest oil consumer. To keep matters in perspective though, even with China's oil demand level expected to climb by 5.5%, to 7.95 million barrels a day this year, it is worth noting the U.S. uses 14.5% more in gasoline alone than China consumes in all the oil it burns.

Watching Saudi Price Moves

While Saudi words flow and more barrels trickle to the market, there's a major card yet to be played that could have a profound impact on bringing down prices.

But a bold move by the Saudis to deeply discount their crude oil in the interest of helping out the global economy doesn't seem to be on the horizon. Such a move would be an affront to fellow OPEC members already critical of the kingdom's actions to lift output outside of an OPEC agreement and, seemingly, at the behest of consumer countries.

The Saudis are well aware that back in 1990, Iraqi President Saddam Hussein unleashed a barrage of words against Kuwait for overproducing and driving down prices before he sent troops across the border.

Market players will be watching closely how the Saudis price their oil sales in coming weeks, particularly if the seemingly inevitable market to $150 a barrel continues.

"Saudi Arabia is ready to raise production if 'needed,' according to the kingdom's oil minister...but the issue of marketability is skirted," Harry Tchilingurian, oil analyst at BNP Paribas in London said in a report Wednesday. "There is no indication that deeper discounts should be expected."

Source: Dow Jones Newswires

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