Oil prices close at record high

By Jad Mouawad

Published: August 1, 2007

NEW YORK: The great oil rally, now in its fourth year, shows no sign of slowing down.

Oil prices reached a record Tuesday, exceeding the peak last summer. Light, sweet crude oil futures for September delivery ended at $78.21 a barrel, up $1.38. It was the highest closing price since oil contracts began trading on the New York Mercantile Exchange in 1983. In early trading Wednesday, U.S. crude dropped to $77.70.

Despite the dip, many analysts expect oil prices to keep rising this year. The previous highest closing price of $77.03 was set in July 2006 at the onset of war between Hezbollah and Israel.

During the trading session Tuesday, oil rose as high as $78.28 a barrel, falling a few pennies short of the intraday trading high last year of $78.40.

Unlike the jump last year, the gains on energy markets these last few weeks have not been caused mainly by geopolitical tensions, although these have not disappeared in Iraq, Iran or Venezuela. Rather, the latest surge is the result of tighter market conditions this summer and concerns about insufficient supplies.

Oil prices have risen by 28 percent since the beginning of the year. But that has not slowed the strong growth in oil consumption, bolstered by economic growth in the United States and Asia. Meanwhile, energy supplies have struggled to catch up while a raft of shutdowns at American refineries have crimped production at the busiest time of the year for gasoline.

"The bottom line is the market has tightened up for good," said Jan Stuart, an energy economist at UBS. "From a crude oil fundamental perspective, we're not at the middle of the up cycle yet. We've got a ways to go."

Paradoxically, gasoline prices in the United States have been falling in recent weeks, despite the rise in oil, as domestic refineries have increased their output. The average price for gasoline nationwide is $2.88 a gallon.

Global oil consumption, meanwhile, is expected to keep growing and reach 86 million barrels a day this year, 1.5 million barrels more than in 2006, according to the International Energy Agency.

Within five years, the agency estimates demand reaching nearly 96 million barrels a day. In a recent report, it warned of a "supply crunch" if oil supplies fail to keep up with the pace of growth in demand.

Traders so far seem to have shrugged off questions about the resilience of the U.S. economy. Last week, the Commerce Department said that the economy expanded at an annual rate of 3.4 percent in the second quarter, faster than analysts had expected.

"It's a period of uncertainty," Antoine Halff, an energy analyst at Fimat, said. "There are mixed signals on the oil market as there are in the broader economy. You have signs that the economy is resilient, and at the same time there are concerns about inflation and about the stock markets.

"There has been a very strong shift in market sentiment; everyone is bullish now," Halff said, referring to the oil market.

A report by Deutsche Bank said Tuesday that Chinese oil demand would rise strongly next year as the Beijing Olympic Games bolster the economy. Chinese oil consumption, which last year was 7.16 million barrels a day, is expected to grow by an annual 6 percent over the next two years.

By 2015, Deutsche Bank estimates, Chinese oil demand will be at 10 million barrels a day.

The rising oil prices prompted a senior OPEC official to suggest earlier this week that the oil cartel might act before its next scheduled meeting if prices reached $80 a barrel. The Organization of the Petroleum Exporting Countries, which controls about 40 percent of global oil exports, meets in Vienna on Sept. 11.

But OPEC members appear divided over what to do next. The group's most hawkish members, like Iran and Venezuela, oppose increasing output. The Iranian oil minister, Kazem Vaziri-Hamaneh, said Sunday that he did not expect OPEC to consider changes to its output at its next meeting.

But Abdalla Salem el-Badri, the OPEC secretary general, suggested Monday that the cartel could release some of its spare capacity to drive down prices.

"A price above $80 also wouldn't make us particularly pleased, Badri said in an interview in the Austrian financial daily Wirtschaftsblatt.

Thanks to high prices last year, OPEC's 12 members had a 22 percent jump in the value of their petroleum exports, to $649.5 billion in 2006 compared with those in the previous year, according to the organization's annual report, released Tuesday.

The group's total oil production, including that of the latest member Angola, was relatively flat at 32 million barrels of oil a day last year, up a mere 280,000 barrels a day from the previous year.

Badri estimated OPEC's untapped production level at 3.5 million barrels a day. But few analysts think that the oil-producing cartel has much capacity to act. The International Energy Agency estimates that OPEC's sustainable spare capacity is 2.8 million barrels a day, much of it in Saudi Arabia.

Even at the high levels today, oil futures are still about $10 a barrel short of the all-time inflation-adjusted peak set in 1981. Oil prices would have to rise to about $90 a barrel to exceed that record.

But that prospect does not seem so distant - or inconceivable - anymore.

Goldman Sachs analysts warned in a recent report that without swift action from Saudi Arabia, oil prices could rise above $90 a barrel this autumn. They said that an increase in OPEC production could help push prices down by $5 to $10 a barrel.

Some analysts said they were surprised by the market's rapid gains this year. "This uptrend that has been in place since 1998 has not ended yet," said Tom Bentz, a senior energy analyst at BNP Paribas. "It's been nearly 10 years now in this bull market and we still have to see higher prices."