Oil price sets records; gas up sharply

Sam Fletcher
Senior Writer

The September contract for benchmark US sweet, light crudes set records for the top intraday trading and closing prices, while natural gas for the same month soared to a 9-month high during the first week of August.

The Aug. 1 death of Saudi Arabia's King Fahd bin Abdul Aziz initially drove crude futures prices to new highs, despite the smooth succession of Crown Prince Abdullah bin Abdulaziz al-Saud to the throne. But energy prices continued to escalate amid concerns about the industry's ability to meet growing energy demand in the fourth quarter and into 2006, especially with several recent refinery problems in the US. "Although crude oil prices have averaged nearly $50/bbl over the past year, global demand, and the US economy in particular, have remained quite resilient," said Robert S. Morris, Banc of America Securities, New York.

The September crude contract shot up to a record of $62.30/bbl in intraday trading on the New York Mercantile Exchange immediately following Fahd's death. It settled at $61.57/bbl on Aug. 1, up by $1 for the day and the highest closing for a front-month contract in the 22 years NYMEX has traded crude futures. Energy prices continued to climb Aug. 2, with September crude futures finishing at a new high of $61.89/bbl on traders' expectations of a continued falloff in US crude inventories.

However, the Energy Information Administration said Aug. 3 that commercial US crude stocks rose for the first time in 5 weeks, up by 200,000 bbl to 318 million bbl during the week ended July 29. Distillate fuel inventories were up by 1.5 million bbl to 127.3 million bbl during the same period, with a sharp increase in diesel fuel more than compensating for a decline in heating oil. Gasoline stocks plunged by 4 million bbl to 205.2 million bbl, indicating continued strong demand.

The September crude price then dropped to $60.86/bbl on NYMEX, but not before hitting an intraday price record of $62.50/bbl. However, it sagged to $61.38/bbl on Aug. 4, as natural gas for September delivery escalated to $8.69/MMbtu during trading before pulling back to $8.47/MMbtu, the highest closing price since last November for a front-month contract and up by 12¢ for the day. Both contracts continued to climb Aug. 5 to new highs of $62.31/bbl for crude and $8.70/MMbtu for natural gas.

Summer heat and humidity across much of the nation created more demand for air conditioning and for natural gas to fuel electric generators. Power grid operators from the Midwest to the Mid-Atlantic reported electricity demand on Aug. 3 exceeded the record high levels recorded the previous week.

Opposite outlooks
In an Aug. 3 report, Paul Horsnell with Barclays Capital Inc. in London said he expects crude prices soon will test $65/bbl in the New York futures market. He noted that it was impossible at that time to buy futures contracts for benchmark US sweet, light crudes "for less than $60/bbl for any delivery date" through December 2011 on NYMEX. "Every 2006 delivery month is currently trading above $64, and a few months have already showed their head above $65. Further, the move up still has some impetus," he said.

Even with members of the Organization of Petroleum Exporting Countries producing at 25-year highs in a struggle to meet world demand, crude prices have increased by 40% this year.

"The oil system, both upstream and downstream, is being run close to sustainable limits, and the tensions created by the absence of slack are now the key driver of prices," Horsnell said. "The profusion of recent snags in the US refining system even suggests that, over time, the system is being pushed beyond its sustainable limits and, hence, that interruptions are becoming more likely."

However, analysts at Strategic Energy & Economic Research Inc. in Winchester, Mass., earlier reported, "Evidence is mounting that this year will see a significant drop in the level of demand growth. Previously, most forecasters projected that demand would grow by 1.5-2 million b/d this year, depending on their bullishness, but now it appears that the low end is the most likely—and may prove too optimistic."

SEER analysts noted, "Chinese demand growth has been quite anemic in the past 6 months, and expectations of higher growth in the second half of this year are based on assumptions which remain untested."

They said, "Fears that OPEC will be unable to meet fourth quarter demand rest heavily on bullish assumptions about both demand and non-OPEC supply and appear very unlikely to materialize."

(Online Aug. 8, 2005; author's e-mail: samf@ogjonline.com)


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