Price of Oil at Precarious High

Maybe not this time, maybe the next, or the one after that but we are going to break over $70 sometime in 2006 and we could end up testing $80.

Published: 13-Apr-2006

f you are attached to the oil markets it is a great time to be plugged in. Very little is really making sense, after all if we really factored in Iran’s nukes, American strikes, Israeli strikes, French riots, Nigerian mayhem, Alaskan pipelines, Iraqi collapse, Repsol downgrades and Hugo Chavez we would already be at $100 and ready for more.

Instead the oil market is like a hungry child in a sweet shop. It can’t sit still and it is permanently distracted by something more amazing than the last thing it was sucking. The Europeans are sucking up Brent crude of that there is no mistake. The normal gap between Brent and the WTI has evaporated as European natural gas prices, currently around 99 pence per therm for 2007, have forced a switch back to oil for some power generators. That is the same as $110 oil. Plus Europe’s refiners are back on stream and champing for product.

Brent is just 50 cents off its all time closing high and pump prices in the U.K. are closing on $2.00 a litre. But then nothing else is sitting still either. Though it has not risen as fast as Brent the NYMEX WTI is within $1.50 of its record high and the OPEC basket is now sitting over $60. That is $10 over where OPEC said they would like it to be. Their basket has doubled in value in three years to be $61.01 and has touched within 70 cents of its record.

Total world spare capacity is, and has been, the underlying driver behind the market over the past few years, coupled with demand. Estimates now put the capacity cushion of the planet Earth at 1.7 million barrels, 1.5 million of which sits with OPEC, most of which is so heavy no one really wants it. The world awaits the end of the refinery bottleneck, so that more complex refineries can actually process the stuff. That is at least five and more like ten years away.

The world was told that the Russians would save us. The Soviet Union and its pathetic 14 million barrels a day was dead. When they upgraded their extraction techniques, oil was going to be around $10 a barrel, we would be swimming in it. In 2004, Russian production grew by 675,000 barrels a day, in 2005 by 222,000 barrels a day and this year the Russian government told us it was going to put on another 240,000 barrels a day. So far they have put on 170,000 barrels a day. It is about 9.4 million barrels a day and it is not enough.

It is true the Saudi Arabians have brought Haradh onstream which should end up producing 300,000 barrels per day within a few months. But all around us we see much larger inflecting acreage, like Cantarell in Mexico, like the whole North Sea and in the blink of a Nigerian Delta gang’s telescopic site we can lose that amount twice over. Imagine if Iran really did stop exporting.

Gasoline is going to drive prices in the next few weeks. The U.S. pump price rose again this week by 9 cents to 258.8 cents a post hurricane high and imports into the U.S. are up and refinery production is down. Rumours are starting to circulate that and overstretched refinery complex cannot recover properly from the hurricane damage. The hurricanes came, refiners ran over time to make more money, bits fell off the refineries, they have to close longer and places like Texas City are taking even longer to bring back than anyone thought.

Of course if refineries do come back online then what are they going to do? They are going to suck up more crude. Inch by inch the market is moving towards a breakout over its old records. Maybe not this time, maybe the next, or the one after that but we are going to break over $70 sometime in 2006 and we could end up testing $80, no problem.

This time the market might pull back from $68.50 for WTI and $68.40 for Brent. But if something odd happens, then traders will see an opportunity and pile straight through. Now $60 is the new floor, $55 is absolutely unbreakable and if we get one more spark then stand back, it’s party time. Not for you of course, you have to pay.


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