Crude Oil Rises on U.S. Inventory Decline as OPEC Boosts Quotas
June 15 (Bloomberg) -- Crude oil rose to the highest in more than two months after the Energy Department reported a larger-than-expected decline in U.S. inventories. An OPEC agreement to boost production quotas failed to stop the gains.
Stockpiles fell 1.8 million barrels to 329 million in the week ended June 10, the report showed. A decline of 1 million barrels was expected, according to the median of forecasts by 16 analysts before the report. Prices have jumped 30 percent this year on concern that OPEC and other producers will be unable to keep up with surging fuel demand in China and the U.S.
``There appears to be nothing that can assuage the market about supply fears in the second half of the year,'' said John Kilduff, vice president of risk management at Fimat USA in New York. ``Crude-oil inventory declines and any bullish news are going to be the focus. There is a lack of additional OPEC capacity so there is no room for error.''
Crude oil for July delivery rose $1.60, or 2.9 percent, to $56.60 a barrel at 1:40 p.m. on the New York Mercantile Exchange. Prices touched $56.70, the highest since April 7. Futures are down 2.9 percent from a record $58.28 a barrel reached on April 4. Prices are up 52 percent from a year ago.
In London, the July Brent crude-oil futures contract rose $1.17, or 2.2 percent, to $54.90 a barrel on the International Petroleum Exchange.
``We are going to make new all-time highs,'' said Phil Flynn, vice president of risk management with Alaron Trading Corp. in Chicago. ``I think we will jump to the $62 area by July 4 and then pull back a bit. It will be similar to what happened when we got above $58 back in April.''
Supplies last week were up 23.5 million barrels, or 7.7 percent, from the five-year average for the date, according to department figures.
`Used Up'
Above-normal U.S. oil inventories ``will be used up in the next month,'' said Boone Pickens, the Dallas hedge fund investor and former oil executive who predicted oil would reach $50 a barrel last year, five months before it happened.
Crude-oil inventories declined last week as refineries boosted production of gasoline, diesel and other fuels to meet rising demand. Production of distillate fuels, a category that includes heating oil and diesel, rose 4.2 percent, to a record 4.4 million barrels a day. Refineries operated at 96.7 percent of their capacity, the highest since July.
Refinery Bottlenecks
``Even the potential 500,000 barrels wouldn't make much of a difference,'' said Tom Bentz, an oil broker at BNP Paribas Commodity Futures Inc. in New York. ``Even the Saudis say that the problem isn't crude-oil availability, it's refinery bottlenecks and a shortage of spare capacity.''
No new refineries have been built in about 30 years in the U.S. and about a decade in Europe. Low profit margins have led to the closure of U.S. refineries during the last two decades. Environmental concern and local opposition to new plants is preventing construction of new facilities.
Saudi Oil Minister Ali al-Naimi has called for more investment in the refining industry to handle lower-quality crude-oil grades that are available.
`Lesser Quality Crude Oil'
All Saudi Arabia has to offer is heavy, sour oil that many refineries are unable to process, said Matt Simmons of Simmons & Co., an energy investment bank in Houston. ``What we know is that if it's lesser quality crude oil, it's essentially useless.''
Simmons is the author of a book, published this month, that says Saudi Arabia overstates its reserves and will fail to increase output to keep pace with rising global demand.
The Organization of Petroleum Exporting Countries will raise targets by 500,000 barrels a day to 28 million, al-Naimi said. The 10 members with quotas, all except Iraq, pumped 28.1 million barrels a day in May, according to Bloomberg data. Ministers from Iran, Venezuela and Kuwait said additional shipments aren't imminent.
``The quotas have become meaningless,'' said Julian Lee, an analyst at the Centre for Global Energy Studies, a London-based consulting company founded by former Saudi oil minister Sheikh Zaki Yamani. ``In addition to Venezuela and Iran, Indonesia is well below its quota, perhaps half a million barrels per day or more. As the quotas increase more and more others are going to find that they simply don't have capacity to meet their quota levels and it's really only Saudi Arabia that has the spare.''
OPEC president Sheikh Ahmad Fahd al-Sabah of Kuwait will start talks to further increase quotas if the price of oil stays above $50 a barrel for seven days.
`No Solution'
``The world faces no shortage of supply of oil,'' the Qatari minister, Abdullah bin Hamad al-Attiyah, said in an interview. ``It's concern about products, like gasoline, diesel. There is a shortage of production of these because of the limitations in refineries. That is the problem that everybody should be paying attention to. How can we solve it? OPEC has no solution.''
Prices paid by U.S. consumers fell last month while manufacturing rebounded, according to government reports.
``Prices are holding steady overall despite the rise in energy,'' Flynn said. ``The situation allows the average consumer to take the hit at the pump and continue to spend at the mall.''
To contact the reporter on this story:
Mark Shenk in New York at mshenk1@bloomberg.net.
Last Updated: June 15, 2005 13:58 EDT
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