The worsening Middle East crisis has shot oil prices to more than 30/bbl for the first time in almost 5 years.
The Saudi decision to increase output (see story, p. 26) had little stabilizing effect on the market. With the growing prospect that war is inevitable and a further loss of productive capacity in the Persian Gulf a strong possibility, Brent for October delivery soared to $30.95/bbl at closing Aug. 22 vs. $25.20 for September delivery the week before. Nymex WTI jumped almost $3 in 1 day to $31.22/bbl for October delivery at closing Aug. 22. That was the first time Nymex WTI topped $30/bbl since the Nov. 27, 1985, close of $30.74 and compares with the Nov. 21, 1985, close of $31.72--the high for that year. Dubai shot up to $29.50/bbl from $22.60 in a week to week comparison, sharply narrowing its recent differential with Brent.
Products prices ramped up in lockstep last week. At Aug. 22 closing, Nymex futures were up almost 3/gal for gasoline and about 7/gal for heating oil, while Mont Belvieu spot propane climbed almost 2/gal on the day. Products price hikes in Rotterdam have outpaced those for crudes. Premium gasoline jumped to $417/metric ton Aug. 22 from $333/metric ton on the week, fueling pressure for retail price hikes in Europe. Gas oil prices in Rotterdam increased to $281/metric ton from $231/metric ton.
The rapid advance in product prices reflects concern that a products shortage in the Persian Gulf will ripple through world markets. The announcement by Saudi refiner/marketer Samarec hat it was halting September deliveries of gas oil, kerosine, and jet fuel from Jubail and Yanbu export refineries heightened market nervousness. No official reason was given for the action, but industry officials think the products will be diverted into the domestic distribution system to service the buildup of U.S. forces in the Eastern Province.
The 250,000 b/d export refinery at Jubail is a joint venture with Royal Dutch/Shell. Shell said if there were to be cuts in export capacities, it might have to share the cuts with Samarec. Shell added that the unit was operating at maximum capacity. It denied rumors that expatriates had been withdrawn from the processing unit and about capacity being cut.
The controversy over products pricing continues to rage in the U.S. as an 8-10/gal jump at the gasoline pump last week sparked a fresh round of outcries from politicians and consumer groups (see Watching Washington, p. 23, and story, p. 28).
However, a flurry of service station runouts killed ARCO's 2 week old gasoline price freeze. ARC hiked gasoline prices last week by an average 2.5/gal in response to a 19% jump in sales volumes and gasoline runouts at more than 160 stations every day. During the price freeze, ARCO's regular unleaded sold for as much as 13/gal below the general market.
At the same time, ARCO is freezing indefinitely the spread between its wholesale gasoline price and the crude oil market price at the level it was in July.
A gasoline price hike by major marketers has stirred political criticism in the U.K. as well. U.K. companies raised prices for premium leaded by 4 pence/imp. gal to 217 pence/imp. gal ($4.97/U.S. gallon), bringing calls from Conservative and Labour politicians for an investigation by Britain's Office of Fair Trading. Prime Minister Thatcher told marketers "prices should not be higher than strictly necessary."
Companies denied price gouging. Shell U.K. said the increases had been delayed as long as possible.
Market skittishness is not being helped by U.S. reluctance to draw down SPR stocks (see editorial, p. 13). Deputy Energy Sec. Henson Moore said last week the U.S. would not need to begin drawing down the SPR until mid-September at the earliest or, more likely, early October. He said any crude shortfall from the Iraq-Kuwait crisis would not appear on world crude markets until then, and may be averted before then by increased production from other OPEC members or from commercial U.S. stock draws.
World oil stocks may be high, but a study by Oxford Institute for Energy Studies contends these may not be easily available to cope with shortages, noting that oil companies and their customers react to a possible supply shortfall and higher prices by increasing stocks. If every driver put an extra gallon of gasoline in his tank, world demand would increase by 10 million b/d, the study estimates.
The study also noted the world refining system has become less flexible. Product stocks are low, and refiners do not have spare capacity to produce additional gasoline or gas oil. Supply problems were expected this year before the loss of about 600,000 b/d of Kuwaiti refining capacity. Government-mandated fuel switching could cut oil demand by 600,000 b/d in 3 months and 1.2 million b/d in 6 months, but the report has little confidence in governments' ability to handle supply problems.
Downstream supply disruptions could aggravate the tendency to hoard as well. An explosion and fire hit a 165,000 b/sd crude distillation unit at Shell's refinery/petrochemical complex at Deer Park, Tex., early Aug. 23. At presstime the fire was being contained to the crude unit. Although the cause still was unknown at presstime, an apparent release of naphtha had ignited. There were two injuries. At presstime it could not be determined how long the crude unit might be down--although other units at the 227,000 b/sd refinery were unaffected--or whether Shell's ability to supply customers would be affected.
Politics is playing a role in the scramble for oil supplies among developing nations.
Saudi Arabia, in an attempt to distance Jordan from political ally and main oil supplier Iraq, has agreed to deliver 33,000 b/d of crude--about half Jordan's demand. The Saudis reportedly will deliver the oil through the 30 in. Trans-Arabia Pipeline, mothballed for more than a decade.
U.S. oil imports growth continued to soar ahead of the Middle East crisis. Imports of crude and products totaled 51.3% of U.S. consumption in July, API said. Total imports averaged 8,989,000 b/d in July, up 8.4% from the same month a year ago.
Total deliveries were 17,516,000 b/d, up 6.5% from a year ago. API said some of the increase went to storage, since it is unlikely consumption rose so strongly. It noted that for the year to date, deliveries were down 0.8%. A push to replenish secondary stocks was spurred by rising prices since the end of June and a surge of products supply, API said. U.S. crude production averaged 7,046,000 b/d in July, down 5.3% from a year ago, and owing mainly to cuts in Alaskan North Slope production caused by maintenance and other projects. API said U.S. crude output has plunged by about 2 million b/d since early 1986.
President Bush signed a comprehensive oil spill law Aug. 18 but not without some complaints.
Bush praised the bill but said it should also have ratified two international oil spill treaties. Senators blocked such a provision because the protocols would have overridden state liability laws (OGJ, Aug. 6, p. 27). Bush found "highly objectional" and will work to repeal a provision blocking drilling of a wildcat off North Carolina, saying the lease holds "the largest potential natural gas field east of the Mississippi."
Mexico is beginning to attract more U.S. capital to build its productive capacity (see story, p. 20). PaineWebber received commitments for $100 million 11.43% senior notes due 1995 to be issued by Pemex. The placement marks Pemex's first participation in the U.S. private placement market since 1982.
It follows similar offerings for Pemex in West Germany and Austria earlier this year. Proceeds will go for exploration and further development in the Cantarell complex area of Campeche Sound off Mexico.
A Japanese joint venture has signed a $2.8 billion loan agreement with Pertamina to finance construction of the planned $1.8 billion, 125,000 b/d grassroots refinery at Balongan in Central Java (OGJ, Nov. 20, 1989, p. 26). Construction began early this year on the refinery, set for start-up in 1994. The venture, Java Petroleum Investment Co., will borrow the money from a group of 21 Japanese banks led by Industrial Bank of Japan.
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