Oil hits record $96/barrel

Price seen spiking to $100
Inquirer
Nov. 02, 2007

SINGAPORE -- The price of oil rose to a new record above US$96 a barrel on Thursday after a surprise drop in US crude stockpiles raised concerns about supplies for the coming winter demand.

A further weakening of the US dollar as a result of the Federal Reserve’s move to cut interest rates by a quarter point and data showing strong US economic growth also contributed to the oil price spike.

Analysts said they didn’t see anything standing in the way of a run to US$100 per barrel after the Organization of Petroleum Exporting Countries (OPEC) continued to resist calls for more oil production. OPEC said the roaring market was beyond its control, with the cartel blaming speculation and politics for the surge in price.

A senior Asian Development Bank official Thursday said the cost of fuel in Asia was still manageable, but he warned that further rises in oil prices could pose a threat to the region’s economies, including the Philippines.

“The decline in US crude oil inventories has been a key driver of oil prices,” said David Moore, commodity strategist at Commonwealth Bank of Australia in Sydney.

Light, sweet crude for December delivery rose to as high as US$96.24 a barrel in electronic trading on the New York Mercantile Exchange by mid-afternoon in Singapore before dropping to US$95.59 a barrel.

Crude prices have reached inflation-adjusted highs set in early 1980. Depending on how the adjustment is calculated, US$38 a barrel then would be worth US$96-$101 or more today.

Oil prices have surged more than 50 percent since the start of the year, and have risen about 18 percent in the past month alone on winter supply worries, speculative buying and a succession of record lows in the US dollar.

“We are stepping into an unknown area. Nobody wants to sell (given the fear of a) further rise,” broker Ken Hasegawa of Fimat Japan told Dow Jones Newswires.

Fall of oil supplies

In its weekly inventory report, the US Energy Information Administration (EIA) said oil supplies fell by 3.9 million barrels last week. Analysts surveyed by Dow Jones Newswires, on average, had expected an increase of 100,000 barrels.

“The US inventory report has reaffirmed the belief that market conditions are tightening and oil prices are ratcheting up higher on that basis,” Moore said.

Much of that decline in inventories was due to a big drop in crude supplies at a closely watched oil terminal in Cushing, Oklahoma.

Cushing oil supplies have been under pressure in recent months due to differences in the price between front-month oil contracts and those for delivery in future months. This price difference, or spread, has given storage tank owners a financial incentive to sell their oil, rather than hold it in inventory.

Analysts have also blamed falling Cushing supplies, in part, for the rally in which oil prices have jumped 35 percent since August.

The EIA also reported that refinery activity fell by 0.9 percentage point last week to 86.2 percent of capacity. Analysts had expected an increase of 0.5 percentage point.

Supplies of gasoline rose last week by 1.3 million barrels. Analysts expected a 400,000-barrel decrease.

And inventories of distillates, which include heating oil and diesel fuel, rose by only 800,000 barrels. Analysts had expected a 1-million barrel decrease.

Rate cut; GDP growth

The US Federal Reserve’s move to cut interest rates by a quarter point also supported prices. Interest rate cuts generally support oil prices because they tend to send the US dollar downward; the dollar is already at multiple-decade lows against major currencies.

The Fed’s second interest rate cut to stave off fears of inflation has added liquidity to financial markets, some of which has been plowed into oil futures because they offer a hedge against a weak dollar.

Even so, the economy of the world’s biggest energy consumer has shown surprising resilience to high oil prices, growing at a brisk clip in the third quarter.

US gross domestic product (GDP) expanded at a 3.9-percent annual rate last quarter, the quickest pace since the first quarter of 2006. Latest data also showed private employers also added 106,000 jobs in October, beating economists’ forecast of 60,000 new jobs.

No shortage, says OPEC

Despite record oil prices, OPEC turned a deaf ear to calls for an increase in oil production.

“The question is if there is any shortage in the supply. There is no . . . shortage in crude oil,” Qatar Oil Minister Abdullah al-Attiyah told reporters in Tokyo on Thursday.

“It’s market-driven and the market is out of our control,” he said, reiterating comments made earlier this week.

For its part, Iran’s acting oil minister said the OPEC was not expected to discuss raising output at informal talks in Riyadh in mid-November.

“I doubt that because there is enough oil in the market . . . Iran does not see a need for an output increase,” Iran’s Gholamhossein Nozari told Reuters, when asked if the OPEC would discuss increasing production in the Saudi capital.

Geopoliticals factors are likewise boosting prospects of an oil price of US$100 per barrel.

Iran warned the United States on Wednesday it would find itself in a “quagmire deeper than Iraq” if it attacked the Islamic state. Russia, however, has intensified efforts for a diplomatic solution to Tehran’s nuclear row with the West.

“It’s just a matter of time . . . Everything you see now are bullish factors, so there is no reason for you to sell at the moment,” Fimat Japan’s Hasegawa said.












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