In the U.S. there is an over-supply of crude oil in the market, at present. Not that it definitely should but, obviously, the price of oil should slide, right? Well, last week the oil prices closed at $81.79 a barrel. There reason? There isn't one but many. Before that let us look at some data:
First, the industry report from the American Petroleum Institute. API report showed:
- Increased crude oil stockpiles on the back of strong imports. The stockpiles increased to 341.6 million barrels, a climb by almost 4.1 million bbl (for week ended February 26). The expected rise was about 1.3 million barrels only. So, this is about three times the estimated increase-a surprise.
- Distillate fuel inventories fell 900,000 bbl to 151.8 million bbl due to high demand.
- Gasoline inventories rose by 700,000 bbl to 231.9 million bbl instead of the expected 300,000 bbl.
Clearly, there is more crude oil in the market. According to analyst from Raymond James & Associates Inc, total petroleum storage is now at 765.3 million bbl or 16 million bbl above the storage levels, same time last year. Oil supplies in the U.S. West Coast increased, with the stockpiles there jumping by 2.31 million barrels contributing to the overall increase in oil -341.6 million bbl. Still, oil managed to override this supply excess and touch the $80 a barrel mark.
The reasons for the oil price rise:
While there are many reasons for the increase, some significant ones are:
According to the U.S. Energy department, refinery utilization in the U.S. rose to 81.9%, an increase by 0.7% for the week ending February 26. The refinery operating rates were the highest since October. For its part, the high refinery cost has compensated for any possible decrease in the price of oil. In addition, the US fuel demand was at 19.3 million barrels for the last four weeks an increase of 3% from last year-according to the department.
Amid this, there were reports of rebel groups attacking oil installations in Nigeria. As Nigeria is Africa's largest oil producer, investors feared for the oil exports from the region. The reports of the attacks are yet to be confirmed, but, still, helped increase the oil prices.
U.S. jobs report showed lower than expected unemployment figures. The report from the Bureau of Labor Statistics department showed unemployment rate unchanged from the January rate of 9.7%. Investors took this as a sign of economic revival with the U.S. President Obama describing the jobs report as "better than expected". As soon as the Labor department came up with the news, dollar fell increasing the oil prices. And how did that happen?
Moving on, there were optimistic signs on the manufacturing font in the U.S. The U.S. Commerce department announced that factory orders rose 1.7% in January mainly due to increased aircraft orders. There was 2.6% increase in durable goods orders. Confidence of the businesses showed as the Inventories continued to increase.
- Higher oil price increases the export bill leading to trade deficits and weak dollar
- Dollar-denominated commodities become cheaper with a weak dollar, in turn increasing the price of oil.
In addition, there emerged positive signs from the world's second biggest oil consumer, China. Last Friday, the Chinese premier Wen Jiabao set an economic target of eight percent for this year. Fair enough since a good economy means better fuel demand.
- Heating oil demand from the Northern hemisphere
- Signs from the Middle-East: Seizure of a Saudi Arabian oil tanker by pirates in the Gulf of Aden too worried the investors. As did the Iraqi parliamentary election due March 7.
- Greece's austerity measures to rein in the debt problem
Oil prices in the coming weeks:
So, will oil manage to climb up, even further? Well, major groups like IEA and EIA have projected strong demand for oil in the near future. According to Barclays oil prices were likely to rise to $80-$90 range. Quoting data from Joint Oil Data Initiative (JODI), which said that the Asian demand for oil was increasing by more than 2 million barrels per day, Barclays analysts Paul Horsnell said, "If Asian demand can grow at such rapid rates when prices are in the $70 to $80 range, then prices cannot stay in that range for much longer".
In China, for a change, the oil stocks are higher than the demand. So, China's largest producer, supplier and refiner of oil, Sinopec is said to be introducing a subsidy of 130 yuan or $19 per ton, in an effort to increase the export of oil. The subsidy is expected to be in place till the demand and supply are balanced.
And, OPEC is meeting on March 17. Analysts predict that there would be no changes in the output quotas. Iraqi Oil Minister Hussain al-Shahristani said "Despite the fact the global economy is gradually recovering, demand has not increased significantly enough to make us reconsider our production ceiling".
Correctly forecasting the price of oil is a science in itself. The situation in the Middle-East should be kept in mind. So, read the reasons, analyse the pointers and make your own judgment before investing.
Published on 2010/03/11 by MERLIN FLOWER