Crude oil futures hit another record high this week on a series of factors including the death of King Fahd of Saudi Arabia, a coup in Mauritania, the death of Sudan’s vice-president, refinery problems in the US and concern about another tropical storm brewing in the Caribbean.
But probably the most important event this week was the move above $60 by all US oil futures dated until December 2011. This indicates that oil investors expect the current tightness in oil and petroleum product supply to remain in place for the foreseeable future.
The US oil futures benchmark September WTI hit a record high of $62.50 a barrel on Wednesday, while WTI contracts for February and March next year popped above $65. In New York afternoon trading on Friday, September WTI added 93 cents to $62.31 a barrel. IPE Brent for September delivery added 95 cents to $61.07 a barrel in London, below Wednesday’s record high of $61.26 a barrel.
Francisco Blanch, energy strategist at Merrill Lynch, said the longer dated futures prices were trading more in sync with the near-dated prices. Until the end of 2003, longer dated WTI futures prices struggled to move above $25, while near dated prices trade in volatile moves.
Mr Blanch said: “The longer dated prices hardly moved, but that has changed as the market has become more concerned about the lack of spare production capacity in the oil supply chain.
“They are not only concerned about supply tightness over the next six months, but the next 12 months, 18 months, 24 months. They are worried that it is going to take a long time before we get back to an oversupply situation,” he said.
The concern about the oil market’s ability to withstand any supply disruptions has made oil investors more sensitive to any political or oil industry event that brings uncertainty.
Barclays Capital, in a note this week, said: “The oil system, both upstream and downstream, is being run close to sustainable limits, and the tensions created by the absence of slack are now the key drivers of prices.”
In the past two weeks a number of US refiners announced a series of unscheduled maintenance work programmes, which will reduce capacity and put more pressure on a refining system already operating close to its working capacity.
US refiner Premcor this week temporary shut down its Port Arthur refinery in Texas. This follows a fire at ChevronTexaco’s El Segundo, California refinery, and the continued shutdown of ExxonMobil’s Joliet, Illinois plant. BP shut a unit at its Texas City refinery on July 31 for maintenance. The plant also suffered an explosion and fire last week.
Barclays said: “The profusion of recent snags in the US refining system even suggests that, over time, the system is being pushed beyond sustainable limits and, hence, that interruptions are becoming more likely.”
Cameron Hanover, a US energy trading company, said the refinery problems tend to affect gasoline disproportionately, because gasoline output accounts for 48 per cent to 55 per cent of the refined barrel.
It said production of distillates, which include heating oil and diesel, account for 18 per cent to 24 per cent of the barrel. “Because of recent problems, gasoline output is likely to have been impacted the most,” it said.
September Nymex gasoline futures were poised to close at a record high on Friday, rising 2.17 cents to $1.8210 a gallon, and up more than 4 per cent on the week.
Another sign of market nervousness was the reaction to political events this week with the smooth transition of power from King Fahd to Crown Prince Abdullah enough to send oil prices to new elevated levels, even though it is very unlikely there is going to be any change in the Kingdom’s oil policy.
Political events in two of the world’s poorest countries also raised concerns about future oil supplies from emerging oil producers Mauritania and Sudan.
