Oil futures passed $50/barrel overnight, largely based on low US inventories and the anticipation of unrest in Nigeria, which could disrupt supply. The Wall Street Journal has a slug of articles today about oil prices, fuel efficiency, how natural gas prices are increasing the costs of exploiting Canada’s oil sands, etc. The best of the lot is this article on low US inventories and Nigerian unrest (subscription required), which notes
The decline in American inventories is roiling markets because the U.S., as the world’s largest oil user by far, is the main setter of world prices. The fall in stockpiles was exacerbated by Hurricane Ivan’s hammering of key producing and transport facilities in the oil-rich Gulf of Mexico. Oil output in the U.S. gulf is still running about 25% below normal, robbing U.S. refiners of needed supplies and prompting the Bush administration to make some emergency loans to buyers from the U.S. government’s Strategic Petroleum Reserve. The government is considering making more such loans. …
The inventory pinch comes at a time when the world’s oil producers, including members of the Organization of Petroleum Exporting Countries, have little or no effective capacity to produce more oil. Oil markets also have been fretting about instability in the Middle East, the world’s largest oil region, and the threat of a disruption to exports from OAO Yukos, which produces about 2% of the world’s oil and which is locked in a long-running tax dispute with the Russian government.
On Monday, spreading unrest in Nigeria, another major oil producer, also sent ripples through the markets. The leader of the rebel group fighting Nigerian government troops in the oil-rich Niger delta said the rebels will launch “all-out war on the Nigerian state” from Oct. 1 and advised all oil companies to shut production by then, according to Reuters. It isn’t known whether the rebels have the power to disrupt oil production. …
The refining system’s capacity for handling high-sulfur oil is already about fully engaged. Middle East exporters such as Saudi Arabia largely produce high-sulfur crude, and their oil is attracting relatively little buying interest, even though they are offering larger-than-usual discounts compared with low-sulfur crudes. Those discounts are now as much as $10 a barrel for Dubai benchmark crude versus the European Brent benchmark, for instance, up from an average of just under $2 a barrel in 2003.
All that means that the world’s only big supplier of oil with additional pumping capacity, Saudi Arabia, has limited power to moderate oil-price increases.
Experts say it is likely the industry can get by with inventories below the 270-million-barrel level, in part because of efficiency gains by refiners. Lawrence Eagles, an analyst at the IEA, figures that the decline in U.S. inventories to below 270 million barrels is a temporary blip, as it proved to be in 2002, and that the industry “is comfortably prepared to meet winter demand.” Yet Mr. Eagles notes that world demand for oil is running at a much higher rate at a time of capacity constraints.
But this National Post article says that Saudi Arabia is going to increase its production by 16 percent, to 11 million barrels per day. Can they really deliver on that promise? According to this AP report in Forbes, Saudi Oil Minister Ali Naimi says that the increase will come in an oil field where they’ve just started up production. Such a statement suggests that some exploration and capacity expansion have taken place. We’ll see; I’m a bit of a skeptic on that topic. Plus, as the WSJ article quoted above notes, our refining capacity for high-sulfur crude is full, so the bottleneck is in the refining part of the supply chain. That bottleneck is likely to cause high prices for refined products to persist.