Crude prices soared to record highs above $78/bbl July 14 after Hezbollah raids into Israel triggered an Israeli military incursion into southern Lebanon earlier that week.
The August contract for US light, sweet crudes hit an all-time high of $76.85/bbl for a front-month contract during intraday trading July 13 on the New York Mercantile Exchange. Its closing price also was a record, $76.70/bbl. The price continued climbing to $78.40/bbl in electronic trading after the market closed then settled at another record high finish of 77.03/bbl on July 14.
Iranian President Mahmoud Ahmadinejad warned that an Israeli attack on Syria would be construed as an act against the Islamic world. Both Iran and Syria support Hezbollah militants. Ahmadinejad also threatened to end Iran's minimal cooperation with the United Nations after the US and its allies resolved to refer their dispute over Iran's nuclear research to the UN Security Council. "Headline-driven reactions to developments involving Iran's nuclear program continue to have a major impact on market sentiment," said the Paris-based International Energy Agency (IEA) in its July report.
Meanwhile, the Organization of Petroleum Exporting Countries expressed concern about—but denied responsibility for—record high crude prices. Instead, it blamed "geopolitical developments, over which OPEC has no influence." It said crude supplies "well in excess of demand" continue to enter the market, and inventories among member countries of the Organization for Economic Cooperation and Development stocks are above 5-year average levels. "This healthy state of the upstream sector has been very much due to OPEC's abiding commitment to market stability, with prices at fair and equitable levels," said OPEC officials. The average price for OPEC's basket of 11 benchmark crudes increased to $70.38/bbl July 13.
Crude supplies from OPEC increased by 200,000 b/d to 29.8 million b/d after Iraq recently resumed exports through Ceyhan, Turkey. "OPEC capacity is seen rising by 300,000 b/d by end-2006 and a further 800,000 b/d in 2007. Inclusion of biofuel supply and weaker demand trim the 'call on OPEC crude and stock change' to 28.8 million b/d for 2006. The 2007 call on OPEC ranges between 28.4-29.2 million b/d when allowing for non-OPEC slippage and statistical differences," IEA reported.
OECD's oil stocks built by 42 million bbl in May to 2.7 billion bbl, or 7 million bbl above 2005 levels. "The build was centered in product inventories in North America, where increased refinery output added to supplies," IEA said. Output increased as four refineries near Lake Charles, La., resumed operations earlier disrupted by the June 19 spill of 47,000 bbl of oil into the Calcasieu Ship Channel.
Growth in world demand for oil products remains "largely unchanged for 2006 at 1.21 million b/d," as weak second-quarter consumption among OECD members is counterbalanced by a strong Chinese market. "Demand projections for 2007 show growth of 1.57 million b/d based on recoveries in North America and Southeast Asia," said IEA.
It expects non-OPEC production to increase by 1.7 million b/d in 2007, up from growth of 1.1 million b/d in 2006 and no expansion in 2005.
"IEA tabulations now imply that global inventories have built by about 530 million bbl since the long period of stock build began at the start of second quarter 2005," said Paul Horsnell, Barclays Capital Inc., London. "However, that picture appears to be a mirage."
He claims IEA analysts "have been far too assiduous in their quest to count every drop of supply and have found a few elements that do not really exist, or they have not been assiduous enough in counting demand. Whatever the source of the error actually is, 530 million bbl of global oil stock build over the past 15 months is not in our view at all credible."
The Energy Information Administration said US crude inventories plunged by 6 million bbl to 335.3 million bbl during the week ended July 7. Gasoline stocks lost 400,000 bbl to 212.7 million bbl during the same period. Distillate fuel inventories rose by 2.6 million bbl to 129.9 million bbl, with a large increase in ultralow-sulfur diesel fuel overcoming a slight decline in heating oil.
The latest US data "show a further tightening in overall recorded inventories of 5.5 million bbl relative to the 5-year average," Horsnell said. "The build in inventories above the 5-year average, (excluding the volatile category of 'other oils'), now stands some 40 million bbl lower than the high-water mark that was hit in early March. In other words, relative to the usual seasonal pattern, US inventories have been falling by some 300,000 b/d over the course of a 4-month period."
Market Journal will appear online next on July 31.
(Online July 17, 2006; author's e-mail: [email protected])