Commodities | Jul 07 2006
By Greg Peel
The WTI crude futures price hit a record US$75.19/bbl in the spot month overnight in New York. Every delivery month in 2007 closed above US$77/bbl.
Last week FN Arena reported (Is Oil In Oversupply Or What?) that there were plenty of commentators suggesting supply had caught up to demand for oil, and that demand itself was slipping. Barclays Capital wouldn’t have a bar of it.
If that’s the case, said Barclays, why was the oil price still rising?
We also noted the four elements of the oil price were supply, demand, gasoline and geopolitical wildcards. Well we certainly scored the latter. But a record price has not been achieved just because North Korea has tested a few missiles.
It was late April when the oil price last tested these levels, and Barclays notes a pullback ensued due to the onset of demand pessimism and supply optimism. It won’t be pulling back in a hurry this time, says Barclays.
The analysts believe that the second quarter has proven to be extremely tight on a global demand/supply basis. Not only has the regular seasonal stock-build fallen short of expectations, they believe it’s failed to occur at all. Any contention about demand destruction and supply surpluses is wishful thinking.
Says Barclays: "If you are looking for the explanation for, and justification of, the latest move up in prices, we do not believe that you have to look much further than these tightening balances".
The reality is OPEC supply has been running down in the latest year on year, non-OPEC supply is flat and demand is up, not down. Barclays believes 2006 demand will actually exceed 2005, contrary to a lot of opinion, and China will remain the culprit. It’s not such a hard concept to fathom when one considers the exponential rise of car sales at the very least.
There also remains the refinery problems of (a) not enough capacity to refine the stuff fast enough even if it was in surplus and (b) most of the oil coming out of OPEC is unsuitable heavy crude. This is why gasoline prices remain under pressure of their own, and why Australia is looking at $1.50/l by next week.
Of a more influential geopolitical concern is Iran’s response to the latest price hike. It now wants to postpone nuclear negotiations, and this has raised Condy’s ire. "If Iran is trying to stall [it] is not going to work", said Condy.
Of course this bit of posturing will only push the oil price higher still.