Oil Surges To $93 — Is This Price Sustainable?
Kurt Brouwer October 29th, 2007
The change in oil prices this year has been stunning. Oil began the year at roughly $54 per barrel and now has surged above $93. That’s a 72% plus increase in 10 months.
Oil Tops $93 A Barrel as Mexico Shuts Production (MarketWatch, October 29, 2007, Morning Zhou & Steve Goldstein)
‘Crude-oil futures rose past $93 a barrel for the first time on Monday, after bad weather forced a halt to production in Mexico and the dollar touched the lowest level against the euro in more than eight years.
Crude futures for December delivery rose for a fourth day and closed at a new record high of $93.53 a barrel on New York Mercantile Exchange. Earlier it reached an intraday high of $93.8 a barrel.
Mexico’s state-owned Petroleos Mexicanos, one of the largest crude suppliers to the U.S., halted production of 600,000 barrels a day due to inclement weather on Sunday.
Petroleos Mexicanos, also known as Pemex, said it hopes to resume production in days.Mexico is U.S.’s second largest crude supply country after Canada, shipping 1.66 million barrels a day in the first eight months, according to the Energy Department.
Pemex is Mexico’s largest company with annual revenue of nearly $100 billion. It’s also the third largest producer of crude oil in the world, according to the company’s Web site.
“The Pemex shutdown is only putting a further floor under the already surging oil price, weakening dollar concerns are also pushing crude higher,” said Kevin Kerr, president of Kerrtrade.com and editor of Dow Jones MarketWatch’s Global Resources Trader…’
The dramatic price change for oil this year has been perplexing. Certainly, we can point to instability in the Mideast as well as in oil patch countries such as Nigeria and Venezuela. Also, the dollar has been weak and that plays a role. Plus, developing countries such as China and India are booming and using more oil than they used to use. All of these factors are significant, yet they do not readily justify a 72% spike in oil prices.
In the following article [emphasis added], the finance chief for Royal Dutch Shell points out how hard it is to justify the price surge:
Oil Price ‘driven by speculators and politics’ (Telegraph.co.uk, Russell Hotten, October 26, 2007)
‘Peter Voser, finance chief at Europe’s biggest oil company, Royal Dutch Shell, warned the industry not to bank on record crude prices to drive revenues in the future, as prices rose to a record high of more than $91 a barrel in New York.
He said the oil price was being driven up by speculators and political factors, rather than any fundamental problems with production and supply, and called predictions that the price per barrel would hit $100 “too speculative”.
“To be honest, we find it hard to explain the oil prices,” said Mr Voser. Prices rose 1pc to $91.40 a barrel yesterday as concerns grew that supply from the Middle East could diminish with political uncertainty…’
‘…But, while making no predictions about future oil prices, he added: “At the end of the day you don’t see anybody queuing for gasoline or any shortages. Inventories are well supplied and refining margins have been lower, which is an indication of a well-supplied market.
“From that point of view, the price seems to be driven by some speculation and also has a political premium in it,” he said…’
If Mr. Vosser of Royal Dutch Shell declines to try and predict future oil prices, then I won’t make a prediction either. However, I am suggesting that oil prices have gone up too far and too fast due to an imbalance in demand and supply. And, supply and demand do not stay out of balance forever. High prices mean that producers want to pump and ship as much oil as they can. It means users start working out ways they can cut back and use less. Eventually, supply and demand get back into balance and prices do too. That does not mean prices will fall precipitously, but it does mean that this surge is likely to be unsustainable without a substantial pullback at some point.
- Economy , Geopolitics , Money
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