Oil Prices Briefly Move Past $80
Thursday, September 13, 2007
Crude oil prices hit a record yesterday, briefly topping $80 a barrel as the Energy Department reported an unexpectedly sharp drop in U.S. inventories, a hurricane warning closed the Houston Ship Channel and oil traders discounted the significance of OPEC's announced plan to slightly raise its output.
Though still short of an inflation-adjusted peak hit in early 1981, crude oil prices settled yesterday at $79.91 a barrel after reaching $80.18 earlier in the day on the New York Mercantile Exchange. Prices at the gasoline pump are below their all-time highs, but they usually lag only slightly behind crude oil prices and could climb soon.
Oil experts warned that the latest spike in prices was part of a long-term trend in which oil-rich countries restrict access to their resources and keep just enough petroleum off the market to boost prices at a time of steadily rising demand in places like the United States, China and the Middle East.
"People should understand the fundamentals," said J. Robinson West, chairman and founder of PFC Energy, a District consulting firm. "This challenge of meeting surging global demand isn't over yet. And inventories are such that the whole situation puts OPEC in the driver's seat."
One catalyst for yesterday's $1.68-a-barrel increase in crude prices was a report by the Energy Information Administration, which said U.S. crude oil stocks fell by 7.1 million barrels in the week ended Sept. 7, more than twice the amount most oil analysts expected. Another EIA report on Tuesday said U.S. gasoline inventories were equivalent to 19.7 days' supply at the end of August, the lowest since the agency began measuring such levels in March 1991.
The lower inventories were seen as leaving the country exposed to any disruption in the supply of oil or gas. Traders are particularly nervous about reports that Tropical Storm Humberto was approaching Galveston, Tex., close to a large portion of the nation's oil and gas production, import terminals and pipelines. The storm was expected to make landfall early this morning.
Oil traders have also been worried about other potential supply disruptions, including further possible attacks by insurgents in Nigeria's oil-rich Niger River delta and in Mexico, where oil pipelines were hit by explosions this week.
Yesterday's price rise also indicated that markets feared that oil production increases adopted at Tuesday's meeting of the Organization of the Petroleum Exporting Countries would be insufficient to meet demand this winter.
The International Energy Agency, while lowering its overall projection of world oil demand, said the world would need to draw 32.4 million barrels a day from OPEC nations. OPEC, which churns out about 40 percent of the world's oil supply, is currently producing 30.4 million barrels a day.
That means that the half-million-barrel-a-day increase OPEC announced Tuesday would still result in a shortfall of slightly more than 1.5 million barrels a day, said Frank A. Verrastro, a senior fellow at the Center for Strategic and International Studies. In addition, he noted, the United Arab Emirates is expected to do work in its oil fields that could lower its production in November.
"The market has discounted the OPEC increases," he said. "It leaves people unnerved."
"There is realization in the aftermath of the OPEC meeting that OPEC didn't do very much to temper tightening markets," said Edward Morse, chief oil economist at Lehman Brothers. Low inventories and relatively modest surplus capacity in oil-producing nations meant that one blow could send prices even higher.
Morse said another factor bolstering petroleum prices was the credit crunch in the United States. He said it was driving some investors out of equities and into commodity funds comprised largely of oil. Although an economic slowdown could dampen commodity prices, Morse said many investors still saw commodities as a way to diversify their holdings. In addition, Morse said he didn't expect credit problems stemming from the subprime mortgage crisis would slow the economy enough to drive down oil prices.
"It's very hard to think about how what's going on in credit markets is going to affect Chinese demand or other emerging market demand [for oil]," he said.