Producers
Cash In On
Record-high Oil Prices
By Adam Porter
12 October, 2004
Aljazeera
As
oil prices reach a new record of $53.40 a barrel, the worry is that
any new surge could take oil to $60 or higher.
Until recently,
technical analysts - those who plot charts and graphs of commodity movements
- saw $51.20 as a fundamental breaking point for oil prices.
The $51.20 barrier
has been breached yet, by all accounts, the market is as confused and
volatile as before. And it will remain so for the foreseeable future.
Despite pronouncements
from those trying to calm the markets with words, market fundamentals
are unavoidable.
"The market
wants light sweet crude at the moment," said Frederic Lasserre
of Societe Generale in Paris. "And we have two problems with this,
both are strikes.
"One coming
up, probably a short one in Nigeria but also another one in Norway.
This is adding to the problems that we have because these two countries
produce light sweet crude and this is the oil the market wants at the
moment."
Raging demand increases
over the past three years have stretched supply lines to the limit.
The nature of the
market drives the desire for short-term gains from oil companies, shareholders,
executives (who stand to earn performance bonuses), and producer countries
hungry for extra cash. Those desires have meant a vested interest in
high prices and low investment in supply capacity.
Markets have also
been worried by a litany of problems that just will not stop coming.
Reports of falling company production; strikes in Norway and Nigeria;
conflicting Opec promises; fall in US heating fuel stocks; and rises
in gas prices all are to blame for the unprecedented nervousness in
the market.
This week two large
American oil companies, Conoco Phillips and Marathon, both reported
drops in production. Conoco, which has created a partnership with Russia's
Lukoil in recent days, said it produced around 7% less oil in the third
fiscal quarter. It blamed "scheduled maintenance", and a seasonal
drop in demand.
Marathon Oil, the
fourth biggest US oil company, reported a 9.8% drop in production. It
said this was due to the effects of Hurricane Ivan, problems with supply
in Equatorial Guinea, and "unplanned downtime". Neither event
was what traders wanted to hear.
Opec, meanwhile,
continued to baffle the markets. The chairman of the 12-nation producer
group, Chairman Purnomo Yusgiantoro, led the way in making seemingly
conflicting statements.
First, Yusgiantoro
said: "If prices continue to go up, there will be a danger to the
global economy. I warn that high oil prices will result in the start
of a recession."
Just a few days
later, he said Opec did not just have their oft-quoted 1.5 million barrels
of spare capacity, that in fact there was surplus global capacity "of
2.5 million barrels a day".
"No one is
listening to Opec at the moment. They are only communicating, they are
unable to take action. Opec cannot do anything about the current situation,"
Societe Generale's Lasserre said.
They may have spare
capacity in Saudi Arabia, but it is oil the market does not want. Heavy
sour crude is not the sort of oil that is needed to bring down prices.
As a result, the market is not paying much attention to Opec."
Weekly US inventory
figures - the stocks held in commercial hands - had grown slightly.
But this was following eight out of nine straight falls.
Crude oil stocks
rebounded by 1.1 million barrels, but perhaps more surprisingly, heating
oil supplies actually fell 2.1mb. This is the time of year when the
US normally sees an increase in heating oil stocks, used to fire oil-powered
central-heating and air-conditioning systems.
The market is still
blaming the effects of Hurricane Ivan. But US oil stocks fell right
across the country, not just in the Gulf of Mexico. Also, self-evidently,
not all US refineries are on the Gulf coast.
This has led analysts
to further dismiss the claims of Opec that it can maintain supply. The
promised extra supplies are simply not arriving.
"We have really
lost those two weeks when Hurricane Ivan arrived," Lasserre said.
"The market has not been able to recoup the time lost and as a
result we are entering the American winter with low stocks.
"Again, the
market wants oil that it can make into the heating oil or kerosene that
the Americans want, but it is not there. This is driving the price up
as well."
At the same time,
producer countries are raking in the dollars. Perhaps the best indicator
of this is that Coutts Bank of London is to double its Middle Eastern
arm staff in order to benefit "from oil cash".
Ordinary people
in the US, however, will be part of that operation, but not beneficiaries
like the banks or oil producers. They will be the ones who pay up this
winter.
So says the US government's
Energy Information Administration in its report Winter Fuels Outlook.
It foresees gas
and oil heating prices as set to rise by anywhere from 11.2% to 28.8%.
A household in the American north-east will pay nearly double the heating
costs it paid in the winter of 2001/02.
If they are right,
it is boom time for the oil barons and banks, but bad times ahead for
the consumer.