The Global Petroleum Perspective

APS Review Oil Market Trends, June 19, 2006

World crude oil prices will be moving below or above $70/barrel for front-month WTI on NYMEX through the coming months, and much higher price levels would be expected if the hurricane season hits the US as hard as it did in 2005. Leading the price movers are speculators in oil futures markets, and the world oil supply/demand situation will stay tight through 2006 and the following years.

The past working week ended on June 16 with July WTI closing at $69.97/barrel on news that Iran was carefully studying a package of "carrots and sticks" presented to Tehran on June 6 by the five permanent members of the UN Security Council (UNSC) and Germany. The previous week had ended on June 9 with July WTI closing at $71.64/b on news that Iran had resumed uranium enrichment on the very June 6 day that the six powers had explained the package to the Iranians.

Dated Brent on June 16 closed at $55.85/b, while spot WTI closed at $69.88. NYMEX gasoline closed at $2.028/gallon. NYMEX natural gas ended with $7.13/m BTU, while the spot Henry Hub price was $7.04/m BTU. The New York City Gate price of natural gas closed at $7.66/m BTU.

Worries about the global economy arose on June 17 after news that US industrial production had unexpectedly fallen in May following several months of strong expansion. That was a further sign that a slowdown in US consumption and the housing market may be affecting the world's economy.

US industrial production fell 0.1% from April, with the decline widespread but particularly strong in consumer durables, cars and construction materials, according to figures from the US Federal Reserve (Fed). Car sales dropped 1% on the month, while sales of home appliances were down 1.3%. Brian Bethune, US economist at Global Insight, was on June 17 quoted as saying: "Industrial output hit a major speed bump in...May, with broad-based declines across the major [US] industries". He added, however, that after the strength of recent months, US industrial output remained robust overall and was headed for a moderate slowdown in the second and third quarters.

The Fed holds its next meeting on interest rates at the end of June amid widespread speculation that it may call a halt to its string of 16 interest rate rises over the past two years because of evidence the economy is beginning to slow down. But most economists say recent strong inflation numbers mean the Fed will probably raise the cost of borrowing by a quarter point to 5.25%, and possibly to 5.5%, when it next meets in August.

Worries the nuclear dispute between Tehran and the West may cut crude oil supply from Iran helped WTI hit a record high above $75 in late April. US Energy Secretary Sam Bodman on June 16 called Tehran's initial positive comments "encouraging". WTI and Brent futures had gained on June 14-15, aided by data showing a fall in US crude oil stocks as refineries ramped up operations to meet peak US gasoline demand in the summer. Commodities and oil fell earlier in the week on worries that inflation would lead to higher interest rates, slowing economic growth and energy demand. Overall, oil prices are up nearly 13% so far this year and stand at their highest, in real terms, since 1980. They have surged from $20/b at the start of 2002.

A US Government Accounting Office (GAO) report says crude oil prices could go up $11/b if markets faced another loss of Venezuelan crude. Venezuela's petroleum industry was severely disrupted by a two-month strike at the state-owned Petroleos de Venezuela (PDVSA) which began on Dec. 2, 2002 and ended in February 2003, cutting off exports to its main customer - the US - and pushing up world prices. The strike prompted the GAO to examine what would happen if Venezuelan supplies were again cut off as relations between Caracas and Washington deteriorate. Reuters on June 17 quoted the GAO report as saying: "A loss of 2.2 million barrels of crude per day - about the size of the loss during the Venezuelan strike - would, all else remaining equal, result in a crude price spike of up to $11 per barrel".

The US, by far the biggest oil market in the world, is the top buyer of Venezuelan crude and refined petroleum products. But US-Venezuelan ties have been strained since the populist Hugo Chavez first won the presidency in late 1998. Chavez accuses the Bush administration of having backed a failed April 2002 coup attempt against him. Washington denies the charges; but Chavez keeps saying any attempt by the US to invade Venezuela or assassinate him will result in a suspension of US oil sales. US consumers would face higher prices at the pump in such an event, according to the GAO report, which also studied the possibility of a reduction in exports or closure of PDVSA's refineries in the US. The report said: "A Venezuelan oil embargo against the United States would increase consumer prices for petroleum products in the short-term because US refiners would experience higher costs getting replacement supplies".

An idea of the extent to which world oil prices could rise in the coming years is the fact that in the US 860 out of 1,000 people own a car - in Europe it is 680 out of 1,000 - while in China only 13 out of 1,000 people own a car. A developed country, with GDP of at least $10,000 per capita, consumes at least 10 barrels of crude oil per capita. The US consumes about 25 barrels per capita, West Europe and other developed countries from 10 to 18 barrels per capita. The world average is about 4.6 barrels per capita.