Bloomberg: Oil Surges to a Record on Concern Demand Is Outpacing Supply

Oil Surges to a Record on Concern Demand Is Outpacing Supply

March 17 (Bloomberg) -- Crude oil surged to a record $56.69 a barrel as a promise of increased output from OPEC failed to ease concern that demand for gasoline and other fuels is rising faster than supply.

OPEC said yesterday's agreement to add 500,000 barrels a day to its output quota won't immediately change supply, which already exceeds the limit. U.S. gasoline rose to a record after stockpiles last week had their biggest decline since September. Saudi Arabia, the only OPEC member with significant untapped production capacity, warned of higher demand later this year.

``Traders know that there is very little ability for a big increase'' in OPEC's output, Tom James, managing partner in London of energy and commodity consultant Global Risk Partners, said in an e-mail. ``This year we're not looking to see any major drop in oil demand.''

Crude oil for April rose as much as 23 cents, or 0.4 percent, in after-hours electronic trading on the New York Mercantile Exchange to the highest intraday price since the contract was introduced in 1983. It was at $56.64 at 8:30 a.m. Singapore time.

Yesterday, the April contract rose $1.41, or 2.6 percent, to $56.46 a barrel, a record closing price.

Futures jumped more than $1.50 in 15 minutes after the Energy Department's weekly report showed U.S. gasoline supplies fell by 2.9 million barrels last week, almost three times the decline expected by analysts in a Bloomberg survey.

OPEC

The Organization of Petroleum Exporting Countries will hold talks on another 500,000 barrels a day increase in the output quota starting from May 1, OPEC President Sheikh Ahmad Fahd al- Sabah told reporters in Isfahan, Iran, where the group met yesterday. Because members are already supplying more than planned, additional barrels may not come until May, he said.

``There is little OPEC can do to get more on the market,'' said John Kilduff, senior vice president of energy risk management with Fimat USA in New York. ``OPEC has ended up marginalizing themselves. The increase in quotas only highlights their lack of spare capacity.''

U.S. crude-oil supplies gained 2.6 million barrels to 305.2 million last week, the highest since June, and 8.2 percent higher than a year earlier, according to Energy Department data. Analysts surveyed by Bloomberg forecast a 2 million barrel increase.

Gasoline supplies fell for a second week to 221.4 million barrels, the report showed. Supplies remained 9.4 percent higher than a year earlier.

`Gasoline Spooked Market'

``It was the gasoline number that spooked the market,'' said David Thurtell, commodity strategist at Commonwealth Bank of Australia in Sydney.

Gasoline for April delivery rose 4.1 cents, or 2.7 percent, to $1.5483 a gallon in New York, the highest closing price since the contract was introduced in 1984. It was at $1.55 in after- hours trading.

``We're worried about the high-demand period this summer and our ability to keep up with gasoline consumption,'' said Phil Flynn, vice president of risk management with Alaron Trading Corp. in Chicago. ``U.S. crude supplies rose last week but with the growth of China there's going to be more competition for barrels in the months ahead.''

China's fuel use will rise 7.9 percent this year, or 500,000 barrels a day, to 6.88 million barrels a day, according to the Paris-based agency. China is the second biggest oil consumer after the U.S.

Al-Naimi

Global supply is sufficient to boost inventories now, Saudi Oil Minister Ali al-Naimi said yesterday in Isfahan.

``When we project into the fourth quarter, we see a substantial rise between the third quarter and the fourth,'' he said. ``We believe additional crude is needed. How much, we don't know.''

OPEC pumped 29.85 million barrels of oil a day in February, according to a Bloomberg survey of oil companies, producers and analysts. The ten members with quotas, all except Iraq, have a production ceiling of 27 million barrels a day and exceeded that by almost a million barrels last month.

The International Energy Agency, an adviser on energy policy to 26 industrialized nations, forecast in a report last week that oil consumption will climb by 1.81 million barrels, or 2.2 percent, to 84.3 million barrels a day this year. It was 330,000 barrels more than the agency forecast last month.

Prices rose in 1974 after an oil embargo that followed the Arab-Israeli war and from 1979 through 1981 after Iran cut oil exports. The average cost of oil used by U.S. refiners was $35.24 a barrel in 1981, according to the Energy Department, or $75.71 in today's dollars.

Prudent Investor comments...

As noted before a weakening dollar, demand supply imbalances, government interventions, terrorism and geopolitical tensions have all contributed to the bull market of energy prices such as crude oil. We are poised to see a continuation of higher oil prices, higher inflation levels and higher interest rates which will be detrimental to most financial markets.

As of this writing most Asian bourses are down almost in sympathy with the shellacked US equity markets. However, defying the trend are the global oil stocks which have risen in the recent past in congruence to higher oil prices, as Matthew Lynn of Bloomberg says, “The London stock market is going through a speculative frenzy over oil exploration stocks. Investors are piling into stocks based on little more than rumors and hope. Shares are being sold on the back of the purported expertise of developers, not business plans.” But not in the Philippines, whose market looks insulated from macro developments and has been a playground for speculative ‘trash’ issues.