Oil Thunders to New High on OPEC Decision, U.S. Crude Stocks Draw

Oil has yet a again hit a new high, with the NYMEX front-month crude futures contract rising to as much as US$104.56/b during intraday trading yesterday. Prices then went on to close somewhat lower, but still a record in itself of US$104.42—a jump of US$5 over the previous close. In London, ICE April Brent futures also closed up, US$4.12 to US$101.64/b.

The primary drivers of the latest jump in prices appear to be twofold: namely, the decision by OPEC to roll over production levels, and the news from the United States that crude inventories had shown an unexpected drawdown. Speculation over the last few days and weeks on what OPEC might decide to do with output has been feverish, ranging from suggestions of a cut in output to even increasing production. In the event, the cartel, which met yesterday in Vienna, Austria, to discuss this issue officially decided to keep production unchanged. The decision has prompted a wave of vitriol between the United States, which believes oil markets to be undersupplied, and OPEC, which believes the opposite to be true. OPEC has gone as far as to accuse the United States of “economic mismanagement”, effectively wiping its hands of responsibility for the state of oil prices. Meanwhile, U.S. President George W. Bush, himself facing the prospect of presiding over a weakening economy, has described the OPEC roll-over decision as a “mistake”. There is little doubt that this frank exchange of views has played its own part in helping to push up oil, despite an already widespread acceptance by Tuesday evening (4 March) that the cartel would quite likely make no change.

The other key factor in pushing up prices has been the question of crude oil inventory levels in the United States, which, contrary to market expectations, showed a large fall over the course of the week. The Energy Information Administration (EIA), the statistical arm of the Department of Energy, yesterday revealed that crude oil stocks dropped by 3.1 million barrels on the week—itself the first drawdown of the year thus far. Since January, crude oil stocks have increased every week, from 282.8 million barrels to 308.5 million barrels last week. It is against this context that crude prices have continued to rise. Crude stocks in the country now amount to 305.45 million barrels—some 18.8 million barrels lower than over the same period last year. Most of the fall appears to have been in West Coast (PAD V) crude stocks.

Gasoline (petrol) inventory levels meanwhile have risen by 1.7 million barrels, to 234.3 million barrels—up 17.9 million barrels on the year. Refinery throughput rates have also proved higher, which, with crude imports dropping by 521,000 b/d in the week to 9.437 million b/d, at once help to explain the both crude drawdown and the increase in gasoline stocks. Refining inputs jumped to 85.91%, from 84.68% last week, and 83.52% the week before that.

Outlook and Implications

Crude prices had only just broken their all-time inflation-adjusted high on Monday (3 March), and even that event had been preceded by a spate of new records over the last few weeks. Oil prices remain high, due in part to a drive by large investors taking positions in commodities to hedge against a falling U.S. dollar. The dollar has gradually been decreasing in value relative to other major international currencies as concern over weakening performance in the world’s largest economy has come to the fore. With crude prices continuing to climb almost in step with U.S. crude inventories since January, the stage was very much already set for further rises should an unexpected crude drawdown take place. At the time of writing, NYMEX April crude futures were trading down somewhat, standing at US$103.98/b.

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