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Hope floats oil prices

Sam Fletcher
OGJ Senior Writer

The brief May 28 meeting of members of the Organization of Petroleum Exporting Countries essentially "was over before it started" after Saudi Arabia Oil Minister Ali I. al-Naimi said in advance that the world economy is showing enough signs of recovery to cope with $75-80/bbl oil, said analysts at KBC Market Services, a division of KBC Process Technology Ltd. in Surrey, UK.

The July contract for benchmark US crudes escalated to $65.08/bbl on the New York Mercantile Exchange after OPEC voted to maintain its 24.85 million bbl production ceiling for the 11 members other than Iraq. It continued climbing to $66.31/bbl May 29, capping a five-session rally with the highest closing since Nov. 4.

Most independent analysts disagree with Al-Naimi's "level of confidence," however. KBC analysts expect world oil demand to decline 1.9 million b/d this year and drop another 300,000 b/d in 2010—"back to the level seen in 2005."

Still, just because $75/bbl oil is a minority view "does not mean that it is not going to happen," said Paul Horsnell, a managing director and head of commodities research at Barclays Capital in London. "We expect prices to move above $75, and potentially fairly rapidly, as the market's fear of economic discontinuities abates further," he said.

Still, KBC analysts claimed, "We have an oil market where recent price increases are governed not by what is going on now in the real world but by what could be a rosier outlook in 6 months' time. Investment funds looking for promising returns are buying into oil and other commodities in the belief that a return to growth will happen, and they want to be in on the ground floor ahead of this recovery. By climbing on board now they are of course helping to kick-start the price recovery."

Meanwhile, they said, demand is weak and shows little sign of improving, while oil stocks—based on data for primary consumer markets—are not yet falling. Moreover, official inventory figures "exclude oil held offshore in a growing armada of rented tankers," KBC said.

Adam Sieminski, chief energy economist, Deutsche Bank, Washington, DC, also noted the rapid rise in crude prices over the last 3 months was "based more on hope than fact." He said, "One of the few explanations for the bullish move that we find compelling is that the replacement cost of crude oil is at least $60/bbl and perhaps as high as $80/bbl."

Does compliance matter?
In a press conference, OPEC officials "skillfully dodged" the question whether stricter quota compliance would be sought now crude has increased above $60/bbl. "So we can assume that in the current climate quota compliance is no longer a serious issue, as long of course as it does not seriously deteriorate," said KBC analysts.

Latest US crude imports show Saudi Arabia embracing its role as a swing supplier. "US imports of Saudi crude oil in March went below the 1 million b/d mark for the first time since 1990 and were at the lowest level since November 1988, said Olivier Jakob, Petromatrix, Zug, Switzerland. "In February and March, US imports of Saudi crude oil were 525,000 b/d lower than a year ago, but that was not lost to all as fellow OPEC member Angola shipped 300,000 b/d more crude to the US than a year ago," he said.

US oil inventories
Benchmark US crude inventories fell 5.4 million bbl to 363.1 million bbl the week ended May 22. It was the third consecutive weekly decline. However, part of that loss may be because bad weather closed the Louisiana Offshore Oil Port on May 22-23. That same week implied demand for gasoline jumped 300,000 bbl to 9.5 million bbl, a level last seen in August 2007, "despite a 1 million bbl increase in gasoline imports and a much higher refinery utilization rate," Pritchard Capital analysts said.

Although demand increased just prior to the May 24 Memorial Day holiday, Jacques H. Rousseau at Soleil-Back Bay Research said, "We suspect gasoline consumption will not be sustained at these levels" with unemployment still on the rise. Meanwhile, gasoline production escalated to 9.38 million b/d—the largest weekly total since August 2008. "Gasoline inventories could be on the rise in the coming weeks," he said.

Despite continuous draws on crude and gasoline stocks in May, overall US petroleum stocks remained "absolutely unchanged for the third week in a row," Jakob said. The Department of Energy's undefined "Other Oils" category "has been continuously building stocks as gasoline has been drawing stocks and is now at an historic high" up 15.8 million bbl in 4 weeks, he said.

(Online June 1, 2009; author's e-mail: samf@ogjonline.com)


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