Oil fears shift from war to tight supply
Globe and Mail, Monday, September 23
By PATRICK BRETHOUR
Calgary — War worries have pushed crude oil to the $30 (U.S.) mark in recent weeks, but there is a growing conviction that tightening inventories — pinched by the U.S. effort to bulk up its strategic stockpile — could send prices much higher by the end of the year.
Each day, the United States siphons 186,000 barrels of crude oil into its Strategic Petroleum Reserve (SPR), designed as a cushion against any sudden disruption in imports, particularly from the Middle East. Since 2001, the U.S. government has added 40 million barrels to the SPR, part of a push to increase the stockpile to 700 million barrels from 540 million.
The steady buildup of the SPR, which could continue for almost two more years, has begun to muscle aside the so-called war premium as the fundamental driver in sustaining oil prices. "It's not as much a war premium as an SPR premium," said Kyle Cooper, an energy analyst at Salomon Smith Barney Inc. in Houston.
For months, the oil futures markets have been set in the view that oil prices will snap back toward $25 a barrel, or even lower, if the United States decides against attacking Iraq. After three key events last week, futures analysts are beginning to question that logic, as the case builds that the United States could face a squeeze in supply later this year that would likely boost crude prices toward $35 a barrel — and act as an even bigger damper on U.S. economic growth.
Crude oil inventories are already at their lowest level in the United States since March, 2001, with a 6.4-million-barrel decline last week, according to the American Petroleum Institute.
The second major factor in the reassessment is the generally bullish reaction of the oil market to Saddam Hussein's offer to unconditionally admit United Nations inspectors back into Iraq, a proposal that has since been linked to the lifting of the 12-year-old sanctions regime imposed after the 1990 invasion of Kuwait.
There were expectations that oil prices would plummet by $4 a barrel the next day. Oil fell by just 59 cents — and by the end of the week was down just 6 cents — leading some analysts to abandon the idea that a war premium is buoying the market. "I don't think we have one," Tim Evans, senior energy analyst at IFR Pegasus in New York, said bluntly.
The third piece of evidence is last week's decision by the Organization of Petroleum Exporting Countries not to raise formal output quotas. Analysts had been expecting some sort of increase to counter the production cut of two million barrels a day that OPEC put in place in January, especially as North America heads into the winter heating season.
The consortium's members, excluding Iraq, have indulged in cheating since then that largely counteracts the production cut. But OPEC's current output, even with cheating, falls short of the amount that the International Energy Agency estimates is needed to keep global inventories in balance. And that assumes no disruption whatsoever in production from Iraq or any other OPEC member.
In August, the consortium produced 24.94 million b/d, including the 1.56 million barrels from Iraq under UN supervision. But in the fourth quarter, the IEA said, OPEC will need to produce 26.2 million b/d to balance supply with demand — leaving a 1.3 million b/d gap, according to IFR's Mr. Evans.
"Either they need to cheat more, Iraq needs to produce more or it's coming out of inventory," he said.
Some analysts, however, believe that the U.S. market has sufficient supply, pointing to predictions of less-than-spectacular economic growth next year. The Canadian Energy Research Institute said there is about a $6-per-barrel war premium, and is predicting that crude will average $24.75 next year.
For the moment, the cyclical maintenance in the U.S. refinery industry, which reduces the draw on crude inventories, is keeping a lid on prices, Mr. Evans said. Inventories of distillates are relatively high as well, aided by tepid demand for jet fuel.
But those dampers may prove fleeting, while the United States continues to draw off hundreds of thousands a barrels a day, no matter what the market conditions are. "It certainly appears that they want to pump it up, regardless," Mr. Cooper said.
globeandmail.com |
