The Hindu Business Line : Oil is yet again on the front burner

CRUDE is back in news. The US light sweet crude July delivery rose to a 20-year high of $59.52 a barrel before settling at $58.80 on the New York Mercantile Exchange.

Fuelling crude is a string of developments on the ground and not any analyst call, like the Goldman Sachs report that talked of $105 a barrel.

Also, let us not forget that the 26 per cent surge in crude prices from $46.20, has come at a time when OPEC is pumping oil at a pace not seen in 25 years. Or that US crude inventories are at a six-year high.

What, then, is driving oil? A host of factors, including, reduced headroom in producing countries , shortage of refinery capacity and geo-political issues

How is the ever-rising demand for oil to be met? Saudi Arabia is the only country with a small headroom of 1.5 million barrels a day.

Iraq is the lone OPEC member without a quota, but despite strong US efforts, its production has not crossed the 1.5 million barrel a day mark — far less than what was produced during the Saddam Hussein regime.

Another OPEC member, Venezuela's output has failed to recover fully from an anti-government strike over two years ago. And Russia, the biggest exporter outside OPEC, has seen output growth slow sharply this year after the Kremlin cracked down on the production company, Yukos, in a bid to regain political control over the oil sector.

The increased production that OPEC would bring to the market is likely to be inferior quality hard oil, which would require different kind of refineries.

Saudi Arabia says the current high prices are not because of a lower crude supply but lack of adequate refining capacity.

The US, which consumes 25 per cent of the world's oil production, has not built a new refinery since 1976.

The refineries are running at a record 97 per cent capacity already and new facilities would take another two years to become operational, leaving the market vulnerable to spikes.

Hurricane season: The US is now in its official hurricane season, which runs from June 1 to November 30. The National Oceanic and Atmospheric Administration (NOAA) has predicted an active season with 15-17 tropical storms, 7-9 of which would turn into hurricanes.

Major oil rigs are located in the Gulf of Mexico. In this are also the deep draught ports that receive the crude meant for the US.

These rigs and the ports are closed when a hurricane strikes (for safety purposes) thus affecting crude supplies to the refineries. And if one of the hurricanes damages the port facilities or the oil rigs, supplies may take quite a while to recover.

The US refineries, which had to borrow crude from the strategic petroleum reserve in the wake of Hurricane Ivan last year, were able to replenish the reserve only this April.

The recent tropical storm `Arlene' (the first in 2005) indicated the start of the borrowing cycle as oil companies shut down their rigs.

To appreciate the impact of the hurricane-inflicted damage, one must recollect the period from the 1980s through the mid-1990s, when the world had 6-8 million bpd spare capacity.

Today, energy markets are vulnerable to the smallest supply disruptions, such as pipeline stoppages or refinery outages.

An active hurricane season could end up giving oil another of those spikes which is beyond the control of the White House, OPEC or anybody else.

Past rallies in crude have coincided with a weak dollar. But this time a rally in crude anddollar is happening hand-in-hand. For the oil to really start pinching, it need not even rise, the dollar may do the job.

(The author is Director and Head of Research, Anagram Securities Ltd.)

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page

Stories in this Section
A win-win deal

Developing ideas on development

Fuzziness on the fringe

The touchstone of independence

`Related' revelations

Master health check-up of the Big Four

The boss who disappeared from his yacht

Oil is yet again on the front burner

The political blame-game

Sticklish issues

Oil price hike