Oil charges to $66 on capacity worries
Reuters | August 12, 2005
By Peg Mackey
LONDON - Oil prices raced to record highs above $66 a barrel on Friday as investors fretted over the world's strained capacity to refine and pump crude oil.
U.S. oil has risen 52 percent since the start of the year. The stage could be set for further gains, with no let-up seen in global demand growth and no signs that $60-plus oil is harming the economy of the world's largest consumer, the United States.
U.S. light crude at 1242 GMT was up 32 cents at $66.12, just off an all-time high of $66.15 a barrel. London Brent crude was up 41 cents at $65.79, having set another record at $65.88.
"The upstream and downstream constraints are real and long-term and we're seeing almost daily examples of them," said Michael Wittner, head of energy market research at Calyon.
"We're going to have a very strong price environment until the steam is taken out of demand or until investment catches up and restores a spare capacity cushion to production and refining."
Supply limitations were underscored on Thursday by the International Energy Agency which cut its estimate of non-OPEC supply growth. Non-OPEC producers are failing to deliver as much oil as expected this year, leaving OPEC to fill the gap.
That has not proved a problem so far, with global markets well supplied on both crude and products.
Stocks held in OECD countries at 54 days of forward demand cover is one of the market's biggest bearish indicators, according to Calyon's Wittner. "But they are being overwhelmed, correctly, by the capacity constraints," he said.
U.S. gasoline supplies have been threatened by a series of refinery troubles, the latest being the shutdown of several units at BP's giant 460,000 barrel-per-day (bpd) refinery in Texas City, the third largest in the United States.
ConocoPhillips was also forced to shut some units at a 306,000-bpd refinery in Illinois due to a power loss.
Record-high pump prices appear to have had little impact on demand. U.S. gasoline futures are trading just shy of $2 a gallon.
Those high prices have yet to take a toll on the world's largest economy. Latest economic data showed U.S. retail sales jumped 1.8 percent last month, with the biggest gain in auto sales due to buyer incentives.
In real terms, stripping out inflation, oil is well below the $80 a barrel on average for the year after the 1979 Iranian revolution.
But at an average of more than $53 for the year to date on U.S. oil, prices are well beyond levels during the 1974 Arab oil embargo.
The diplomatic row over Iran's nuclear program also underpinned prices as dealers feared the potential impact on supplies from OPEC's second-biggest producer if the United Nations were to impose sanctions.
The European Union will push for Iran to be referred to the Security Council for punitive action if Tehran fails to suspend its nuclear activities.