Crude oil futures hurtled back towards records levels on Friday as fears about the impact from Hurricane Dennis on US oil supplies displaced the effect of the London bombings on market sentiment.
Another factor behind the rise was the continued strength of oil demand in the US, where demand for petrol and distillates, which include heating oil and diesel, were running at record levels last week.
The demand strength in the face of record nominal prices underlines the oil market’s resilience and raises the prospect of further oil price increases, particularly if there is supply disruption during the Atlantic hurricane season.
The US department of energy said US drivers are paying, on average, 33 cents more for a gallon of petrol then they did 12 months ago, with the average price for a gallon of petrol at $2.226 last week,
“The increase in gasoline prices does not add much to the cost of a typical vacation trip, with the additional cost probably less than a family of four might spend on one fast food meal,” the department said this week.
“The increase does not seem likely to cause many people to cancel their vacation plans,” it said.
With prices not having the predicted restraining effect, US gasoline demand hit a record 9.7m barrels a day last week in the period leading up to the Independence Day holiday weekend. US gasoline demand growth is running at 2.7 per cent a year.
Deborah White, senior economist energy at Société Genérale, said this growth rate was higher than the 1-2 per cent growth rate predicted at the start of the year.
The robust US gasoline demand sent unleaded gasoline futures to a record $1.8600 a gallon on the New York Mercantile Exchange on Friday, a gain of more than 4 cents on the day and a 70 per cent rise since the start of the year.
Ms White said that, with US refiners operating at 98.1 per cent of capacity, a level deemed unsustainable in the medium term, supplies will struggle to match current demand rates. The refiners are not complaining, though, as the rise in the price of gasoline has provided margins of a bumper $16 for making a barrel of gasoline.
The US crude oil benchmark, West Texas Intermediate for August delivery, hit an intra-day peak of $61.90, just 20 cents short of the nominal record of $62.10 struck in the previous session. In late morning trade in New York, August WTI was 77 cents higher at $61.50. The January 2006 WTI hit a record $64 yesterday as WTI prices remain above the August contract until February 2007.
In London, IPE Brent for August delivery hit an intra-day high of $60.36 a barrel, just 34 cents short of the nominal record of $60.70 reached on Thursday. In mid-afternoon trade, August Brent was 84 cents higher at $60.15.
The jump in gasoline prices has also reclaimed its lead over US heating oil prices, which was in the unusual position of trading at a premium to gasoline at this time of year. August heating oil futures, which also acts as a proxy for diesel, were steady at $1.7760 a gallon, having set a record nominal high of $1.8125 on Thursday. US distillate demand was also running at a record high last week.
Further record prices may be in store next week if Hurricane Dennis causes further disruption this weekend.
Ms White said the hurricane season is about five weeks old and already there have been four storm warnings. Hurricane Dennis is predicted to reach the southern US coast as early as Sunday.
Michael Lewis, head of commodities research at Deutsche Bank, said in a note that if last year’s Hurricane Ivan is any guide about 11.3m barrels could be taken off-line and possibly trigger the US government to release from its Strategic Petroleum Reserve.
Last year, the SPR lent out a total of 5.4m barrels to refiners who lost output because of Hurricane Ivan. Those barrels were returned to the SPR once the disruption was over.
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