Crude prices soared to new heights as traders ignored an immediate 500,000 b/d hike by the Organization of Petroleum Exporting Countries in its production quota on Mar. 16 to 27.5 million b/d, less than the group's previously acknowledged production level of 27.7 million b/d among the 10 affected members, minus Iraq.
The April contract for benchmark US sweet, light crudes jumped by $1.41 to a record front-month settlement at $56.46/bbl on the New York Mercantile Exchange. April North Sea Brent crude traded as high as $54.95/bbl prior to closing at $54.80/bbl on the International Petroleum Exchange in London. The average price for OPEC's seven benchmark crudes set a record at $50.78/bbl.
"It's not the result we wanted," said Adnan Shihab-Eldin, OPEC's acting secretary general, in response to initial market moves. April crude slipped Mar. 17 but not before hitting a 22-year high of $57.60/bbl in intraday NYMEX trading. It rebounded to a new high closing of $56.72/bbl Mar. 18. OPEC's basket price hit a new high of $51.76/bbl Mar. 17, then pulled back to $51.67/bbl on Mar. 18.
Traders watch inventories
Despite OPEC's nominal adjustment of its production quota, traders focused on a report the same day from the Energy Information Administration that commercial US gasoline stocks fell by 2.9 million bbl to 221.4 million bbl during the week ended Mar. 11. Distillate fuels were down by 1.9 million bbl to 107.3 million bbl, with a sharp decline in heating oil overriding a slight increase in diesel, EIA said. US crude inventories gained 2.6 million bbl to 305.2 million bbl.
US crude imports decreased by 58,000 b/d to more than 10 million b/d during the same period. However, crude input into US refineries increased by 180,000 b/d to 15.1 million b/d, with refineries operating at 90.7% of capacity.
"In stage-managing a move down in prices, the very last thing that OPEC ministers needed was the most bullish US weekly statistics of the year to come out on the same day as their meeting," observed Paul Horsnell, Barclays Capital Inc., London. "Distillate demand is strong, so is residual fuel oil demand, and even gasoline demand is running strong."
With the American Automobile Association reporting record high retail prices for gasoline at a nationwide average of $2.055/gal the day after OPEC's meeting, US gasoline demand appears still to be growing at 2%/year, analysts said. OPEC's increase of its quota ceiling "might not deflate prices or sentiment significantly in the short run, but it is a necessary first step in providing some defense against extreme market tightness in the second half of this year," Horsnell said.
In the weeks preceding the OPEC meeting, the pending event first was "seen as bullish because there might be a cut, and then seen as bullish because there might not be an increase," Horsnell noted. "Now that there has been an increase, it is quite possible that it could be seen as bullish because it signals a compression in the remaining spare [OPEC production] capacity. In other words, in getting the maximum 'bang for the buck' from the quota increase and the maximum downwards leverage on short-term prices, it might have been better left for later."
Possible strategy change
On the other hand, OPEC's action may be "a significant change from basing strategy on the most bearish numbers," Horsnell said. "If the market turns out to be less strong than expected, then supply can always be taken away, while the lesson of last year is that catching up when already close to full [production] capacity is far more problematic."
He said, "If that leads to a short-term change in sentiment and reduction in prices, then all well and good. But if it does not, then that is a lesser concern compared with reducing the chance of an uncontrollable price upside in the fourth quarter."
Horsnell observed, "The meeting has also helped to confirm the now widely held view that the key producers see a [price] range of about $40-50[/bbl] for West Texas Intermediate to be the correct one." He cited a recent statement by Saudi Arabian Oil Minister Ali I. al-Naimi in a newspaper interview: "Current oil price levels of $55 are high, and we want prices to be between $40-$50/bbl."
Horsnell said, "That 'want' is significant in confirming for all that the rules of the game have indeed changed. It also confirms that it is very difficult, if not completely untenable, for analysts to have average price forecasts below $40[/bbl]."
(Online Mar. 21, 2005; author's e-mail: firstname.lastname@example.org)