Business | Oil & Gas
Soaring global crude prices defy supply glut
At least half a million extra barrels of oil are expected to flow to world markets each day in June - news that so far has done little to bring down prices from record-high levels.
- Reuters
- Published: 00:15 May 21, 2008
London: At least half a million extra barrels of oil are expected to flow to world markets each day in June - news that so far has done little to bring down prices from record-high levels.
Oil at close to $130 a barrel is worrying not just for consumers, but also for major oil firms and producer countries fearful of demand destruction and a potential price collapse.
"The price is scary," a senior western oil executive said. "The market may be poised for a big drop, especially if the speculators exit in a hurry."
So far, the highest profile predictions have been for further price rises.
Goldman Sachs on Friday raised its forecast for oil prices in the second half of this year to an average of $141 a barrel.
This pushed US crude to its latest record of $129.31, while traders ignored news that Saudi Arabia had been pumping an extra 300,000 barrels per day (bpd) since May 10 and would maintain production levels in June.
The market also dismissed higher export goals for Iraq, which aims to raise shipments by at least 125,000 bpd in June.
"What would it take to move prices down?" asked David Dugdale of MFC Global Investment Management. "The marginal cost of oil is about $80, but we're a long way from that."
The marginal cost is the amount required to bring on hard-to-access oil only considered viable when other supplies fail to meet demand. It can be viewed as a level below which prices are unlikely to fall.
Washington last week looked to an even lower floor when it approved legislation to stop the refilling of the US emergency stockpile until crude prices fell below $75 a barrel. The effect is to add around 75,000 bpd to the oil market.
On top of that and the extra Saudi and Iraqi crude, ship-loads of Iranian oil have been floating at sea for weeks, awaiting buyers.
Commodity markets always revert to fundamentals of supply and demand because they are underpinned by raw materials. If buyers do not emerge when prices are high, a surplus will build and deflate prices.
Oil firms and producer nations bear the scars of the last slump from a peak of just below $27 in December 1996 to a low below $11 a barrel in December 1998 after the industry invested in new production only to see demand collapse.
Outlook: Speculators pose risk
As the US currency weakened, making dollar-denominated commodities relatively cheap, and other markets appear unlikely to deliver high returns, financial players have increased their positions in commodities.
Investors such as pension funds tend to lock in for the long term and are not expected to leave the market quickly, but short-term speculators could sell more rapidly.
For now, they could be held in the market by expectations any supply increase is temporary as refinery maintenance pushes extra oil on to the market.
Business Editor's choice
-
‘Wrong Way' Krugman
The source of our economic malfunction lies with government-mandated bank regulations
-
Greek exit could make Eurozone stronger
Departure will show limits of bailouts and allow remaining members to act much more like a unit
-
UAE upholds values of free trade
Recently released statistics confirm an established fact, namely that of the UAE embracing the free trade principle in general and imports in particular
