A Tight Oil Supply-Demand Situation Gets Tighter

Another burst of volatile price rises springing from the aftermath of Hurricane Ivan pushed an already tight supply-demand balance into a higher gear this week. Production outages in the Gulf of Mexico and continuing reduced capacity to import oil through the LOOP (Louisiana Offshore Oil Port) have limited inflows of crude oil supplies into the US and demand from China shows no signs of cooling. In Russia, some limits on exports due to the financial crisis with the Russian firm Yukos have been made worse by renewed tensions in Iraq and limited growth in Iraqi supplies.

From a fundamental perspective, oil consumers are doing all they can to cope with the levels of volatility attached to current prices, but with no obvious effect so far. OPEC has raised production close to their operational maxima and the US and EU are looking at stock management options, but ultimately the fuel price risk might have to be managed financially in the financial markets.

The extreme volatility of prices and the unpredictability of the global oil market fundamentals have made it difficult for traders to hedge forward. With the huge volumes of jet, marine and bottom of the barrel fuels they buy or sell getting it wrong is expensive and risk management is essential

In the markets through September new all-time record prices have been established in both global crude futures benchmarks, and in many physical products. The New York Mercantile Exchange (NYMEX) light, sweet crude future has traded above $50/bbl, International Petroleum Exchange (IPE) Brent has reached nearly $47/bbl, and heating oil/gasoil futures have also established new record prices, well ahead even of the latters traditionally highest levels of price and demand during the winter months. Both geopolitical and fundamental economic factors are combining at present with short-term weather factors to all push such energy benchmarks higher, with concerns growing for the global economy in the light of knock-on effects from such key markets.

Created: Sep 28, 2004