The Hindu : Risk of tighter oil supplies and higher prices

Online edition of India's National Newspaper
Monday, Mar 15, 2004

Business

Business

Risk of tighter oil supplies and higher prices

HUNGER FOR imported oil in China, scanty global inventories of crude, and political unrest in petroleum-rich Venezuela could combine to drive gasoline prices higher this summer, the International Energy Agency warned on Thursday.

Oil output from OPEC producers has lagged behind the growth in demand in China and other parts of Asia, squeezing oil inventories that already stood at historically low levels. Refiners, meanwhile, are adding to a squeeze on gasoline supplies by planning to shut down their plants for routine maintenance as sales of home heating oil ebb in the Northern Hemisphere, the agency said in its monthly oil market report.

These constraints suggest that energy markets face an unusually volatile transition as they shift their focus to gasoline before the peak summer driving season in the U.S. and Europe. "The current market is more fragile than normal,'' the IEA said. The Paris-based agency is the energy watchdog for a group of rich oil-importing nations.

Although the IEA analyzes the supply and demand for crude, it avoids what it considers the politically sensitive task of trying to predict prices. However, some analysts foresee misery at the pump for motorists this summer.

"Gas prices in the U.S. do stand a good risk of setting new records. How long these prices will stay high, no one knows," said Jan Stuart of FIMAT USA, a New York brokerage.

The U.S. demand for gasoline should surge if the economic recovery gathers pace, and Stuart said he sees `quite a good likelihood' of gas selling for as much as $3 a gallon.

Retail gas prices could jump in Europe, too, though the increase would not be as steep. Because most European countries tax gasoline at a much higher rate than the U.S. Government does, a change in the underlying price for gas itself would have a less dramatic impact on the final pump price for Europeans than it would for Americans.

U.S. prices for all grades of gasoline rose 6.9 cents during the last two weeks of February to an average of $1.75 a gallon, according to the latest Lundberg survey of 8,000 filing stations nationwide. Since late December, U.S. gas prices have shot up nearly 25 cents a gallon.

Given a continued rise in Asian oil imports, the IEA again revised its estimate for the growth in worldwide crude demand in 2004. The agency increased its growth forecast by 220,000 barrels a day to 1.65 million barrels, or 2.1 per cent, to an annual demand of 80.2 million barrels.

Although it continues to believe that demand will sag during a lull in April, May and June, the IEA boosted its estimate for demand in the year's second quarter by 350,000 barrels to 78 million barrels.

"There's no question at all that demand in Asia-Pacific in general is leaping ahead again," said John Waterlow of Wood Mackenzie Consultants in Edinburgh, Scotland.

The IEA has singled out China several times in its previous reports as a key reason for quickening growth in global demand. It noted that higher growth is spreading to Taiwan, Thailand and other countries in Asia. So far, U.S. demand growth is also exceeding expectations for the first quarter of 2004, the IEA said.

World oil supplies crept higher in February to 82 million barrels a day, due mostly to greater production in Russia and North America.

The output by the Organisation of Petroleum Exporting Countries fell by 90,000 barrels a day last month to 27.8 million barrels, the agency said. The IEA attributed this decline to fewer shipments from Iraq, where bad weather impeded oil tankers trying to load crude at a Gulf export terminal.

OPEC's output in February, excluding Iraq, which isn't part of the group's production agreement, was almost unchanged from January at 25.8 million barrels, the IEA said. If true, that means that OPEC continued pumping about 1.3 million barrels more than its self-imposed ceiling of 24.5 million barrels and made no effort to comply with its output target despite promising to do so on February 10.

OPEC's quota-busting helped somewhat to dampen last month's rise in crude prices. Even so, prices surged during February by more than $4 a barrel in London and $3 a barrel in New York, the agency said.

In the futures markets on Thursday last week, contracts of North Sea Brent crude for April delivery rose 18 cents to $36.28 a barrel in afternoon trading in London. April contracts of light, sweet U.S. crude were 36 cents higher at $32.35 a barrel in New York.

Oil prices fell on Friday in response to news of an amendment to a Senate budget bill that called for halting the filling of the Strategic Petroleum Reserve and selling the oil to finance deficit reduction. But subsequent reports, including the fact a key senator opposes the non-binding Senate amendment to the fiscal year 2005 budget, eased some of the selling pressure toward the close. April light, sweet crude oil futures fell as low as $35.30 a barrel before climbing back to settle at $36.19 a barrel, down 59 cents. On the London's International Petroleum Exchange, April Brent blend crude oil futures settled down 59 cents at $32.24 a barrel. Senate Energy and Commerce Committee Chairman, Pete Domenici, opposes the amendment introduced on Thursday by Senators Carl Levin and Susan Collins. The budget bill will go to conference, while the House of Representatives develops its own version of the budget bill.

April gasoline futures rose about 5 per cent on Thursday in New York, returning to levels seen last week on renewed terrorism fears, dwindling gasoline stocks and an increase in projected world demand. On Friday, April gasoline futures fell 2.30 cents, or 2 per cent, to close at $1.0973 a gallon. April heating oil futures fell 1.15 cents, or 1.3 per cent, to close at 87.89 cents a gallon on the Nymex. Following the declines in oil and gasoline, April natural gas futures fell 4.7 cents to $5.596 per 1,000 cubic feet.

Signs of political instability in Venezuela in late February intensified the IEA's concerns about of tighter oil supplies and higher prices. Mass protests against Venezuelan President, Hugo Chavez, led him to threaten to disrupt crude exports to the U.S. if Washington tried to interfere. Venezuela is a leading source of U.S. crude imports.

New York Times

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