China (Platts) -- June 23-27, 2008
By reporters at Platts, the energy information division of the McGraw-Hill Companies. For more information about Platts' information products in China, contact Platts at china@platts.com, or call its representative office in Guangzhou at (+86) 20 2881 6588.
Energy prices continued their relentless rise, with benchmark WTI crude oil hitting yet another record high of $140.21/barrel by the end of the week. Front-month Brent also settled at an all-time high, reaching $140.31/b.
Oil prices have so far ballooned some 10-fold since the current bullish mega-cycle began in 2000. Last week's closing level also represents a 46% increase so far this year.
The usual constellation of factors behind higher prices has not changed, but the most immediate factor last Friday was a renewed slide in the US dollar.
"Today's price advance developed on little fresh news and low volume," energy consultant Jim Ritterbusch said in a report last Friday. "As the [US] market proceeds into next week's pre-holiday trade, we expect short position holders to be more on the defensive than the longs, now that the market has re-entered a trading mindset in which the Fed appears to have given a 'go-ahead' to additional inflation increases via their failure to support the US dollar."
Meanwhile, non-commercial participants - which are primarily comprised of hedge funds - added 11,505 contracts of crude futures on NYMEX as of the reporting week ending June 24, according to data released June 27 by the US Commodity Futures Trading Commission.
Non-commercials were long 25,217 contracts. While non-commercials were buying futures, they were hedging their purchases by selling in the options market.
Commercial participants - oil companies, refiners and banks - also added to the long positions, having purchased 2,733 contracts and leaving them long 4,635 contracts.
But there are growing signs that sustained price rise is starting to take a toll on demand.
US petroleum demand fell 2.3% year-over-year on a four-week moving average the week ending June 20, accelerating the slide from the previous US Energy Information Administration report, data showed last week.
US gasoline demand climbed 83,000 b/d to 9.334 million barrels the week ending June 20, but on four-week moving average, implied demand at 9.281 million b/d was 2.1% below year-ago levels.
However, the US is not expected to be the driver of global oil demand growth this year, given that it is currently in the mature phase of a long economic expansion that appears to have abruptly ended with the collapse of the housing sector and the onset of the credit crunch.
An economic slowdown in the US and loose monetary policy kept the US dollar on the defensive throughout the first half 2008, but in reality, daily swings in the greenback masked a currency that was little changed in value.
The Dollar Index on ICE ended 1Q08 at 71.802 but is now headed back down to the 72.00 level as the second quarter was ending. Year-to-date the US Dollar Index was down 5.65%.
The weak US dollar has been a boon to net importers of commodities like China and India, reducing costs and stoking demand.
Fuel subsidies in these markets have kept global demand growth on a solid pace, preventing natural market forces from doing their work, according to several industry observers.
Another factor behind last week's gains was news that US commercial crude stocks fell a counter-seasonal 17.406 million barrels to 301.758 million barrels, leaving inventories 20.252 million barrels below the five-year average and 49.133 million barrels below year-ago levels.
The drop in crude stocks sets the US up for a fairly tight fourth quarter, the period notorious for the highest demand levels of the year.
Meanwhile, equity markets were being battered by the continued run-up in crude prices and the continuing credit problems.
Saudi hosted producer-consumer summit falls short of expectation
Early in the week, crude prices had resumed their upward climb despite a pledge from Saudi Arabia - OPEC's swing producer - to hike output by 300,000 b/d to 9.7 million b/d in July.
Moreover, the Saudis indicated they were ready to pump even more than this to cool prices and ease consumer fears about the availability of crude supply.
But beyond the immediate output increase and a vague Saudi capacity expansion scenario beyond 12.5 million b/d, the highly anticipated energy meeting called by King Abdullah in Jeddah ended with little substance.
The market appeared to largely shrug off the Saudi output pledge, focusing instead on new crude production problems in Nigeria on increased militant unrest.
"Although the Saudi summit provided for good discussion, it was generally viewed as a non-event," energy consultant Jim Ritterbusch said in a report.
Heads of government and oil ministers from 35 producing and consuming nations, joined by the heads of all the major international oil companies, agreed that record high oil prices, which prompted the king to summon them at short notice to Jeddah, were a problem but disagreed on the causes.
Algerian Oil Minister Chakib Khelil said the summit threw up differences between oil producers and consumers as to the real reason behind record oil prices, with Libya and Venezuela rejecting calls for a production increase.
Producers blame speculation, while many consumers point to a supply shortage.
Other than the Saudi pledge to increase production, no other OPEC producers said they would raise output, with some ministers, including Khelil, arguing that supply issues were not to blame for the price spike.
"Everyone defended their position and refused to take responsibility for the actual situation in the market," said Khelil, who is also OPEC president.
"Representatives of the big consuming countries such as the US and Spain, stressed the need for a production increase in order to put the brakes on the price rally and insisted that speculation was not to blame for the current state of the market," said Khelil.
Other consuming countries such as the UK and India adopted moderate and "credible" positions in that they admitted there were factors other than the level of production that had led to the near doubling of oil prices in one year, referring to the lack of transparency in futures markets.
In addition to the production increase, King Abdullah also announced other measures, including a call on the OPEC development fund to allocate $1 billion to an energy fund for the poor and a Saudi soft loan of $500 million for the same purpose.
But there was no firm commitment by the Saudi oil giant to expand its production capacity, as some had hoped, beyond the 12.5 million b/d expected by the end of next year.
A final communique noted the "existence of spare capacity throughout the oil supply chain is important for the stability of the global oil market.
Hence an appropriate increase in investment, both upstream and downstream, is necessary to ensure that the markets are supplied in a timely and adequate manner."
As if to make a point, state-owned Saudi Aramco signed an agreement with French major Total to build a 400,000 b/d refinery and petrochemicals plant in Eastern Saudi Arabia at a cost of more than $10 billion.
The full conversion refinery, to come on line at the end of 2012, will process Arabian Heavy crude of the type that will make up the bulk of incremental barrels, necessitating investment in refineries that could convert the grade into lighter products.
The communique also said participants had welcomed an invitation from the UK's Brown to meet again in London before the end of 2008.
Brown, the highest-ranking foreign dignitary at the Jeddah meeting, earlier called for a step-change in cooperation between producing and consuming countries and more investment in the sector to tackle the threat of record oil prices.
In a briefing with reporters in Jeddah, Brown said high oil prices were "the biggest problem the world is facing at the moment."
Updated: June 30, 2008
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