Not Mixing With Rest of Economy, Oil Floats Higher
Friday, May 29, 2009
The price of crude oil once again seems to be defying the economic forces of gravity.
There's plenty of evidence to suggest prices should be falling. In industrialized countries, storage tanks are overflowing, with enough supplies to cover 62 days of use, about 10 days more than usual. Economic weakness continues to depress world demand, which is on track to fall for the second consecutive year. And oil-producing countries, while restraining output, are adding to production capacity. New Saudi Arabian wells coming on line this year will exceed the entire production capacity of Texas.
But instead of dropping, the price of crude oil rose to more than $65 a barrel yesterday, the highest in more than six months. And some analysts said it could rise even higher as the summer driving season arrives. Saudi Arabian Oil Minister Ali al-Naimi said this week that a $75-a-barrel price was within reach.
Analysts said the price was rising as traders and investors see signs that the U.S. economy is at or near bottom. Optimists looked to rising world stock markets, indications of a possible rebound in Chinese oil demand, and scattered signs of an uptick in U.S. driving. In the Washington area, more people appeared to have taken to the road for the Memorial Day weekend; the beach resort of Ocean City, using wastewater use to track the volume of toilets flushed, estimated that it received more Memorial Day weekend visitors than it had since 1993.
Moreover, some analysts argue that oil prices must rise to cover the cost of finding new barrels. The number of oil and natural gas rigs operating in the United States has plunged 56 percent since hitting a 22-year high last September, suggesting that low prices now could mean high prices later.
"Most people understand that you can't sell something for below cost without running out of it," said Adam Sieminski, oil economist at Deutsche Bank Securities. "Someone's saying this can't last that long."
But other analysts said that oil prices were still high given economic weakness and plentiful supplies and that exploration costs have been falling.
Yesterday, the Organization of the Petroleum Exporting Countries, citing the global recession, said it would leave production unchanged. "Although some recent positive economic indicators point towards the possibility of the recession bottoming out before year-end, the world is nevertheless still faced with weak industrial production, shrinking world trade and high unemployment," the 13-member cartel said in a communique after meeting in Vienna. The group accounts for nearly 40 percent of world petroleum production capacity.
On Wednesday, Exxon Mobil chief executive Rex Tillerson told shareholders at the company's annual meeting that there was little explanation for the recent run-up in oil prices.
"There's really been no substantial change in demand," he said. "There's been little to no change in inventories."
Tillerson said that higher prices were "just a bet" on the part of investors "on whether the green shoots have roots or not." He added, "none of us really know yet. It's still too early to call this economy."
Edward Morse, chief economist of LCM Commodities, said: "The main determinant of oil prices over the past two months have been expectations. We are in an 'expeculation' frenzy."
He said that investors were looking to oil as a way to protect themselves from inflation and predicted that a sluggish economy, a weak driving season and contained inflation would bump oil prices back down again in the coming weeks.
Other analysts said there were signs that U.S. motorists and truck drivers, who consume more than one in every eight barrels of oil produced worldwide, were not reverting to earlier driving habits even though U.S. pump prices for regular gasoline average $2.45 a gallon, a full $1.50 lower than they were last year at this time, according to the auto club AAA.
The federal Energy Information Administration said yesterday that over the four weeks that ended May 22, U.S. demand for motor gasoline averaged about 9.2 million barrels a day, down 0.4 percent from the same period last year. Distillate fuel demand, largely for use in trucking, dropped 9.9 percent from the same period last year. Jet fuel demand fell 9.1 percent.
John Townsend, a spokesman for AAA, said the surge in travelers to Ocean City might have been due to people seeking out vacations closer to home to save money. He said regular weekday driving was still down.
New fuel efficiency standards set this month by the Obama administration and the growing use of biofuels could further constrain petroleum use for transportation in coming years. Exxon's Tillerson said at the company's annual meeting that U.S. gasoline consumption may have peaked. "We do think motor gasoline demand has by and large peaked in the United States and will likely continue a rather slow and steady decline in the years ahead" as U.S. cars and trucks become more fuel-efficient, he said.