Grand gamble on rising oil prices pays off
Saturday, 4 August 2007
Javier Blas in London
Investors have made their biggest ever bet on risingoil prices and the gamble is paying off.
A combination of refinery outages, strong demand and lower production by the Organisation of the Petroleum Exporting Countries has taken prices to within a whisker of their record highs. Prices have risen $7 a barrel in July, hitting an 11-month record of $78.40 a barrel yesterday.
An attack on the record high of $78.65 a barrel reached last August is just a question of time, according to analysts. Francisco Blanch, of Merrill Lynch in London, said: "Any small supply disruption could push up prices above $80 a barrel." Bets on rising oil prices - or long positions - last week rose to a record high of 112,287 contracts, according to the US Commodity Future Trading Commission.
Eugen Weinberg, of Commerzbank in Frankfurt, said: "Large speculators have never adopted such a positive position."
Although speculative money is helping to make oil more expensive, analysts said the continuing price increase was well supported by tight fundamentals, both on the upstream and downstream sides of the industry.
"Today's price increase is not as speculative as it was last summer," said Adam Robinson, of Lehman Brothers in New York, referring to the oil price jump to $78.65 in August 2006 amid geo- political tensions sparked by Israeli action against militants in Lebanon.
"Stronger product demand growth, an increasingly broken global refinery system and reduced crude oil supply versus last year have combined to tighten petroleum markets fundamentally," said Mr Robinson.
The International Energy Agency, the industrialised countries' energy watchdog, has provided additional sentiment support after warning in a report last week that the world economy might face a crude oil "supply crunch" within five years.
The IEA said in its Medium Term Oil Market Report that "oil looks extremely tight in five years' time" and there are "prospects of even tighter natural gas markets at the turn of the decade".
Deutsche Bank yesterday raised its medium-term forecast from $45 to $60 a barrel. In 2002, the investment bank's medium-term price forecast was just $24 abarrel.
The energy watchdog's message helped push up long-term contract prices, with futures contracts for delivery from 2009 to 2015 yesterday hitting record highs above $70 a barrel.
Adam Sieminski, Deutsche Bank's chief energy economist in New York, said: "In an environment of a weak US dollar, elevated geopolitical risk, strong world growth and persisting concerns that non-Opec production maybe peaking, we expect oil prices will continue to trade expensively."
In the short term, a plague of refinery outages has hit the US, Europe and Japan, chopping petrol and heating oil supply. At one point in June, refinery output in the US was down 1m b/d from last year's levels, and 0.4m b/d in Europe.
Jeffrey Currie, of Goldman Sachs in London, said: "The exceptionally low level ofUS refinery utilisation,combined with solid demand growth, has helped to tighten the petroleum product complex, maintainingUS petrol inventories at extremely low levels forthis time of the year."
US petrol inventories are down 3.3 per cent from last year's level, and heating oil inventories down 5.8 per cent, leaving the system vulnerable towards the winter.
Neil Atkinson, of KBC Markets in London, said that with the summer driving season reaching its peak, further stock draws and price pressure were likely unless refinery utilisation picked up. In the past four weeks US refineries processed only 15.4m barrels a day, down 3 per cent from last year's levels.
Any increase in refinery utilisation would contribute to a further tightening of the crude oil market, already cramped by a combination of Opec production restraints and disappointing non-Opec supply growth.
Leo Drollas, of the Centre for Global Energy Studies, said that crude oil inventories in the first quarter of the year fell three times more than the 1998-2006 average, while they increased by just a third of the traditional amount in the second quarter.
The result is global crude oil inventories have fallen from 56 days in the third quarter of last year to 53.6 days last month. The US department of energy has warned that unless Opec raises output in the second half of the year, inventory levels will fall "to historically low levels bythe end of the year" of about 51 days.
Opec output dropped in June to 30.2m b/d, its lowest point since June 2004 and off 1m b/d from last year.
Non-Opec production growth, which just a year ago was estimated for 2006 at 1.7m b/d, is now running at 0.6m b/d, weighed down by output falls in mature areas, such as the North Sea or Alaska, and project delays in other oil fields.
The extent of the tightness in the crude oil market is demonstrated in the Brent term structure, which has flipped solidly from contango to backwardation for the first time in two years.
Mr Blanch said: "People are willing to pay more for crude oil today than in the future: that is a clear sign that the market is tight."
The IEA has asked Opec to raise production and ease the crude market. The cartel has refused.
Ali Naimi, Saudi Arabian oil minister, said last week: "There is a good balance between supply and demand. Inventories are in a comfortable position, therefore fundamentals do not support high prices today."
The cartel, in its monthly oil report, released yesterday, said the crude oil market was "healthy" and blamed continued tightness on the downstream and "frequent refinery outages" for the price rise.
Currently, the oil cartel thinks that any output boost would only add to inventories, rather than cap prices. That would expose the oil market to a situation similar to last year, when prices plunged $20 a barrel in weeks amid inflated inventories at the end of the Atlantic hurricane season.
This summer, with the hurricane season still on its way and a strong fundamental background, speculative money is betting, to Opec's discomfort, on rising prices.
"You know how much speculative money there is in the market?" Mr Naimi asked rhetorically last week. "Plenty."
Investors have made their biggest ever bet on risingoil prices and the gamble is paying off.
A combination of refinery outages, strong demand and lower production by the Organisation of the Petroleum Exporting Countries has taken prices to within a whisker of their record highs. Prices have risen $7 a barrel in July, hitting an 11-month record of $78.40 a barrel yesterday.
An attack on the record high of $78.65 a barrel reached last August is just a question of time, according to analysts. Francisco Blanch, of Merrill Lynch in London, said: "Any small supply disruption could push up prices above $80 a barrel." Bets on rising oil prices - or long positions - last week rose to a record high of 112,287 contracts, according to the US Commodity Future Trading Commission.
Eugen Weinberg, of Commerzbank in Frankfurt, said: "Large speculators have never adopted such a positive position."
Although speculative money is helping to make oil more expensive, analysts said the continuing price increase was well supported by tight fundamentals, both on the upstream and downstream sides of the industry.
"Today's price increase is not as speculative as it was last summer," said Adam Robinson, of Lehman Brothers in New York, referring to the oil price jump to $78.65 in August 2006 amid geo- political tensions sparked by Israeli action against militants in Lebanon.
"Stronger product demand growth, an increasingly broken global refinery system and reduced crude oil supply versus last year have combined to tighten petroleum markets fundamentally," said Mr Robinson.
The International Energy Agency, the industrialised countries' energy watchdog, has provided additional sentiment support after warning in a report last week that the world economy might face a crude oil "supply crunch" within five years.
The IEA said in its Medium Term Oil Market Report that "oil looks extremely tight in five years' time" and there are "prospects of even tighter natural gas markets at the turn of the decade".
Deutsche Bank yesterday raised its medium-term forecast from $45 to $60 a barrel. In 2002, the investment bank's medium-term price forecast was just $24 abarrel.
The energy watchdog's message helped push up long-term contract prices, with futures contracts for delivery from 2009 to 2015 yesterday hitting record highs above $70 a barrel.
Adam Sieminski, Deutsche Bank's chief energy economist in New York, said: "In an environment of a weak US dollar, elevated geopolitical risk, strong world growth and persisting concerns that non-Opec production maybe peaking, we expect oil prices will continue to trade expensively."
In the short term, a plague of refinery outages has hit the US, Europe and Japan, chopping petrol and heating oil supply. At one point in June, refinery output in the US was down 1m b/d from last year's levels, and 0.4m b/d in Europe.
Jeffrey Currie, of Goldman Sachs in London, said: "The exceptionally low level ofUS refinery utilisation,combined with solid demand growth, has helped to tighten the petroleum product complex, maintainingUS petrol inventories at extremely low levels forthis time of the year."
US petrol inventories are down 3.3 per cent from last year's level, and heating oil inventories down 5.8 per cent, leaving the system vulnerable towards the winter.
Neil Atkinson, of KBC Markets in London, said that with the summer driving season reaching its peak, further stock draws and price pressure were likely unless refinery utilisation picked up. In the past four weeks US refineries processed only 15.4m barrels a day, down 3 per cent from last year's levels.
Any increase in refinery utilisation would contribute to a further tightening of the crude oil market, already cramped by a combination of Opec production restraints and disappointing non-Opec supply growth.
Leo Drollas, of the Centre for Global Energy Studies, said that crude oil inventories in the first quarter of the year fell three times more than the 1998-2006 average, while they increased by just a third of the traditional amount in the second quarter.
The result is global crude oil inventories have fallen from 56 days in the third quarter of last year to 53.6 days last month. The US department of energy has warned that unless Opec raises output in the second half of the year, inventory levels will fall "to historically low levels bythe end of the year" of about 51 days.
Opec output dropped in June to 30.2m b/d, its lowest point since June 2004 and off 1m b/d from last year.
Non-Opec production growth, which just a year ago was estimated for 2006 at 1.7m b/d, is now running at 0.6m b/d, weighed down by output falls in mature areas, such as the North Sea or Alaska, and project delays in other oil fields.
The extent of the tightness in the crude oil market is demonstrated in the Brent term structure, which has flipped solidly from contango to backwardation for the first time in two years.
Mr Blanch said: "People are willing to pay more for crude oil today than in the future: that is a clear sign that the market is tight."
The IEA has asked Opec to raise production and ease the crude market. The cartel has refused.
Ali Naimi, Saudi Arabian oil minister, said last week: "There is a good balance between supply and demand. Inventories are in a comfortable position, therefore fundamentals do not support high prices today."
The cartel, in its monthly oil report, released yesterday, said the crude oil market was "healthy" and blamed continued tightness on the downstream and "frequent refinery outages" for the price rise.
Currently, the oil cartel thinks that any output boost would only add to inventories, rather than cap prices. That would expose the oil market to a situation similar to last year, when prices plunged $20 a barrel in weeks amid inflated inventories at the end of the Atlantic hurricane season.
This summer, with the hurricane season still on its way and a strong fundamental background, speculative money is betting, to Opec's discomfort, on rising prices.
"You know how much speculative money there is in the market?" Mr Naimi asked rhetorically last week. "Plenty."