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Oil Prices Track New Record on Shock U.S. Stock Drop
3 Jul 08
Oil prices have broken new intraday records today, driven by a larger-than-expected drop in U.S. oil inventories, and expectations of widening interest-rate differentials between the United States and the European Union.
Global Insight Perspective | | Significance | Front-month crude futures on both NYMEX and ICE have broken intraday records this morning, with both flowing into new price territory past the US$145/b level. | Implications | The most recent driver for the price jump appears to have been a shock drop in U.S. oil stocks, which registered a fall on the week of 2 million barrels. While markets had been expected a slight draw, the magnitude of the fall, although small as a proportion of total oil inventories, has proved bullish for oil prices. | Outlook | The markets will next be looking towards the European Central Bank, which will today announced a decision on Eurozone interest rates, and an expected rise is likely to push further capital into commodities as the U.S. dollar weakens in value; looking slightly further out, Global Insight expects oil prices to continue rising over the coming months, and could well hit US$160/b before the end of year. |
Amid a sea of bullish data, a much higher-than-expected drop in U.S. oil inventories has contributed to push oil prices to a new record today. The NYMEX front-month crude futures contract has hit an intraday trading high of US$145.43/b. The ICE Brent August futures contract in London, meanwhile, has also firmly breached the US$146/b level, hitting a new intraday high of US$146.34/b. The NYMEX August crude benchmark last night closed at US$143.57/b—up US$ 2.60 on the day. ICE front-month crude closed at US$144.26/b—up US$3.59 on the day. Oil stocks in the world's largest economy last week fell by just under 2 million barrels, taking aggregate stocks below the 300-million-barrel level for the first time since the last week of January. Total oil inventories now stand at 299.8 million barrels—down just 0.7% on the week. Oil stocks fell by a total of 3.9 million barrels on the West and Gulf Coasts, though they rose everywhere else, with the East Coast registering a 10.1% increase to 14.2 million barrels. Gasoline (petrol) and distillate stocks meanwhile both rose, by 2.1 million barrels and 1.3 million barrels respectively. Domestic U.S. oil production was up very marginally during the week by 3,000 b/d with total output running at 5.123 million b/d. Crude oil imports have fallen yet again, by 83,000 b/d, with total imports now running at 10.168 million b/d—down by just under 1% on the week, but down nearly 5.7% on the year. Refinery throughputs have increased by 0.63 of a percentage point to 89.23% of capacity. Production of finished motor gasoline, kerosene, and distillate fuel oils are all down on the week, however, while residual fuel oil and propane output have jumped. Outlook and Implications There is little doubt that the large oil stock draw in the United States has contributed to the latest spike in prices. Markets had been expecting a very marginal draw on the week, so the 2-million-barrel drop has come as a surprise, providing further upward momentum in a market already awash in bullish sentiment. Oil production in Nigeria continues to be a great disappointment, with output from what should be Sub-Saharan Africa's largest producer, running at 25-year lows. Elsewhere, sabre-rattling in the Middle East appears to have increased in rhetorical intensity over the last week, with international pariah Iran threatening to choke the Strait of Hormuz in the event of an attack by either the United States or Israel. A significant fraction of the world's oil-tanker shipments pass through the Strait, and the United States, which maintains a powerful fleet in the region, has already said that Iran will not be "allowed" to touch the Strait regardless of what happens. In the United States, the dollar's weakness shows little sign of abating, with low and flat U.S. interest rates combining with other economic indicators suggestive of falling confidence levels. For its part, the Dow Jones Industrial Average has shed over 17% of its value compared to last year, prompting further impetus for investors to draw funds out of equities and into commodities instead, somewhat magnifying an already-upward trend in oil prices. The controversial question of just how much speculators are affecting oil prices is, at present, an open one, though the U.S. Commodity Futures Trading Commission (CFTC) is due to report back to Congress in September with a tentative answer. The regulator has been under intense political pressure to do more to rein in speculation, which is itself currently being blamed in the United States for expensive oil. High oil and refined fuel prices continue to squeeze demand in the country, with refiners reducing crude imports and drawing on stocks instead. While these data should be bearish for oil prices, demand elsewhere, particularly in China and India, continues to prove extremely robust, even as those economies move to scale back subsidies slightly. As a result, the overall trend remains bullish, and suggestive of continued market tightness. The markets will next be awaiting news from the European Central Bank (ECB), which will today announce a decision on Eurozone interest rates. A rise is widely expected, which will widen the interest rate differentials between the United States and the European Union further—in turn further depressing the value of the U.S. dollar and further pushing capital into commodities. Global Insight expects prices over the next five months to continue on a general upward trend, and should hit US$160/b by the end of the year, before retreating as global demand growth slows in 2009 and beyond.
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