Surprise Inventory Drop
Sends Oil to 12-Year High
By MASOOD FARIVAR
DOW JONES NEWSWIRES
NEW YORK – Crude-oil prices closed at their highest level in 12 years Wednesday after the government reported an unexpected decline in inventories, heightening supply worries ahead of an impending war in Iraq.
Inventories declined by 3.8 million barrels to 269 million barrels in the U.S. last week, slumping below the critical 270-million-barrel mark. The decline came as imports of crude oil fell by 1.058 million barrels a day to 7.62 million barrels and refinery utilization jumped 2.5 percentage points to 90.3% of operating capacity. Most market analysts, thinking imports would rise, had projected a slight build in crude stocks.
At the New York Mercantile Exchange, April crude oil futures jumped $1.11 to close at $37.83 a barrel, the highest settlement for a front-month contract since October 1990, two months after Iraq's invasion of Kuwait.
Gasoline futures also rallied after the Department of Energy reported a surprisingly steep decline of 4.1 million barrels in gasoline stocks. The April gasoline futures contract rose 1.52 cents to $1.1139 a gallon. "Once we fall below 270 million barrels, we are very vulnerable to shortages," said Phil Flynn, an analyst at brokerage firm Alaron Trading Corp. in Chicago. "Whenever you stretch it this tight, things are bound to break down."
The Organization of Petroleum Exporting Countries, the cartel that produces nearly 40% of the world's oil, says the market is well supplied and that it will seek to make up for the loss of any oil caused by a war in Iraq. "There is no shortage of supply, the market is in balance, there is plenty of oil and there is a commitment [to] do our best within our capabilities, which we think are enough to satisfy any shortage in the market for whatever reason," said Saudi Oil Minister Ali Naimi, speaking Tuesday at an OPEC meeting in Vienna.
At that meeting, OPEC members agreed to leave output quotas unchanged but pledged to pump more oil in case of a disruption in Iraqi oil. OPEC officials say the group has enough capacity to make up for the loss of Iraqi oil. Rilwanu Lukman, Nigeria's top oil official, estimated spare capacity at 2 million barrels a day to 2.5 million barrels a day, roughly as much as Iraq currently produces.
But analysts worry that OPEC may not have the capacity to offset the loss of Iraqi oil, let alone any large-scale supply disruption in the Persian Gulf.
The International Energy Agency, the Paris-based energy watchdog for the West, said Wednesday that OPEC's spare capacity will fall below 1 million barrels a day in March, thanks to a sharp increase in the group's output in recent months.
OPEC officials say most of the rise in oil prices is due to the threat of war in Iraq. Speculators have bid up prices in anticipation of a disruption in supplies, they say. Algerian Oil Minister Chakib Khelil said earlier this week that crude oil prices could fall by more than $10 after a war in Iraq.
Some analysts agree with that assessment. Others argue that tight inventories are likely to keep prices well above $30 for the foreseeable future, putting a drag on the economy. Dave Costello, a DOE economist, said that while the agency expects inventories to grow somewhat in the coming weeks they are likely to remain tight enough to keep crude prices above $30 a barrel this year.
"We do think prices will come down but not terribly fast," Mr. Costello said. "We think there is going to be new production but it wouldn't be enough to bring prices down below $30." The DOE forecasts crude oil prices to average around $33.60 a barrel in 2003. Tellingly, that forecast does not take into account the increasing likelihood of war in Iraq.
The spike in oil prices has catapulted pump prices in recent weeks. For the week ended Monday, regular gasoline prices averaged $1.712 a gallon, up 40% from a year ago and a record high for this time of year, according to the DOE. In a weekly report Wednesday, the agency said the rise in gasoline prices is driven by fundamental factors like high crude prices, not price gouging. "Distribution and marketing margins are not unusually high, and there is no evidence of price gouging at any level," it said.
Those factors may lead to further price increases in the months ahead, although the outlook could go either way, the DOE added. Last week, the agency said it expects prices to peak at a record $1.76 per gallon in April. |
