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Crude price waffles above $90/bbl

Sam Fletcher
Senior Writer

The front-month crude futures contract fell $3.45 to $91.17/bbl Nov. 13 on the New York Mercantile Exchange, the lowest level in nearly 2 weeks, after the International Energy Agency (IEA) in Paris reduced its estimates of global oil demand for the fourth quarter through 2008.

Citing higher prices and weaker-than-expected economic data from the US and the former Soviet Union, IEA reduced its projected fourth-quarter demand for crude by 500,000 b/d. The organization also reduced its 2008 demand estimate by 300,000 b/d. IEA estimates world demand for crude will average 85.7 million b/d in 2007, up 1.2% from 2006 levels. It's projecting demand of 87.7 million b/d in 2008, up 2.3% from 2007.

Crude futures prices rebounded Nov. 14 as the market worried about a possible counter-seasonal draw of US oil inventories. But the December contract for benchmark US light, sweet crudes dropped 66¢ to $93.43/bbl Nov. 15 in New York after the Energy Information Administration (EIA) reported the first build in US crude inventories in 4 weeks and the Organization of Petroleum Exporting Countries reduced its forecast for oil demand growth.

Citing higher energy prices and warmer winter weather, OPEC reduced its estimate of fourth-quarter growth in global oil demand by 100,000 b/d to 1.7 million b/d, for a growth rate of 1.97%, down from 2.1% in its previous monthly report. OPEC said demand for crude in 2007 will grow only 1.4%, not 1.5% as previously estimated, but its outlook for the first quarter of 2008 remains unchanged at 1.8% growth, or 1.5 million b/d.

US crude inventories jumped 2.8 million bbl to 314.7 million bbl in the week ended Nov. 9. Consensus of Wall Street analysts was for a decline of 400,000 bbl. US gasoline stocks increased 700,000 bbl to 195 million bbl vs. an expected drop of 200,000 bbl. Distillate fuel inventories fell 2 million bbl to 133.4 million bbl during the same period instead of the expected decline of 100,000 bbl. However, most of that crude build was in the isolated Petroleum Administration for Defense District (PADD) 5, including the West Coast, Alaska, and Hawaii. Crude inventories in PADD 2—the Midwest, including the Cushing, Okla., pipeline distribution point—remained unchanged, said Olivier Jakob, managing director of Petromatrix GMBH, Zug, Switzerland.

"Following a sharp rise in imports, crude oil inventories rose by just 900,000 bbl east of the Rockies and were flat at Cushing," said Paul Horsnell at Barclays Capital Inc., London. "Like crude oil, the rise in gasoline inventories was concentrated on the West Coast, and the required seasonal build before yearend still looks far too anemic to us." Horsnell also noted that US gasoline demand appears to have been down only 0.4% from year-ago levels in the first 8 days of November despite a 39.4% jump in retail prices.

Few things have the potential to be more corrosive to energy prices "than a sudden cholera-like outbreak" of pessimism over crude demands of the US and other members of the Organization for Economic Cooperation and Development, Horsnell said. "The sense of the IEA's comments is that they believe that the speeding up in oil demand growth would have been greater if prices had not risen. In our view that is precisely the reason why prices had to rise because we believe that demand growth rates as high as the IEA's original forecasts could have led to some significant degree of stress within the system," he said.

Major market change
The most significant change in oil markets over the last 10 years "is the increased length of time required for markets to rebalance in the aftermath of both supply and demand shocks," said Adam Sieminski, chief energy economist for Deutsche Bank AG, Washington, DC. "We still believe that oil prices are going to come down from today's levels but that the time frame required to do that has been stretched out," he said. "We still believe that oil prices should eventually fall toward the mid-$60/bbl."

At $95/bbl the real price of crude is "back to levels reached in early 1980s that were associated with a global recession," Sieminski said. "Relative to gross domestic product, however, it would take $125-150/bbl oil to achieve the same peak, because incomes have grown faster than the oil price. There is also good evidence that what causes oil recessions is war-related fears of not getting oil at any price. The slow boil on prices that we have had for the last 7 years is less destructive to consumer psychology. In short, there is no obvious tipping point, and that is why the price keeps going up."

(Online Nov. 19, 2007; author's e-mail: samf@ogjonline.com)


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