Wednesday, September 12, 2007

Oil Prices Certainly Haven't "Peaked"

My Climate Change and Energy Law class discussed peak oil yesterday, discussing the effect of the OPEC quotas and sketchy information from OPEC countries about reserves on our ability to predict or identify when oil production peaks -- and about the trajectory of oil prices we can expect when oil does peak.  That discussion came just in time for today's news: crude oil futures have now passed the $ 80 level for the first time:

Crude marks record close near $80 as supplies drop
                                             

SAN FRANCISCO (MarketWatch) -- Crude-oil futures climbed into uncharted territory Wednesday, peaking above $80 a barrel and closing at a record high just below that level after U.S. government data showed that crude supplies dropped more than 7 million barrels and motor gasoline inventories fell a sixth week in a row.
       
Crude oil for October delivery climbed as high as $80.05 a barrel in regular trading on the New York Mercantile Exchange. That's the highest level a front-month contract has ever reached on the exchange. The previous record was $78.70 from the regular trading session on Aug. 1.
           
            The contract finished the session at $79.91 a barrel, up 2.2%, or $1.68.        
           
The data were a "big shock to the oil market," said John Person, president of NationalFutures.com. The "major draw in inventories is not indicative of a slowing economy."

"Consumers are still soaking up supplies rather than conserving and this is forcing refineries to increase production,"


"The market is painfully getting too pricy as we tap closer to the $80 level."
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U.S. crude supplies dropped a third week, down 7.1 million barrels to 322.6 million, for the week ended Sept. 7, the Energy Department reported early Wednesday.  Supplies have now dropped 14.5 million barrels from the mid-August level, though they're still up about 1.4% from a year ago, the data showed.   

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The American Petroleum Institute confirmed the decline, pegged the size of it at 5.2 million barrels for crude inventories. Its total for the week stood at 321.5 million. 

Motor gasoline supplies fell a sixth straight week, down 700,000 barrels at 190.4 million in the latest week, the Energy Department said. They've tallied a decline of 14.3 million from the late July level.   

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In contrast, the API posted an increase in the fuels supplies. They were up 3.3 million barrels in the latest week, at 200.2 million....The decline in gasoline supplies came as U.S. refinery utilization fell to 90.5% of capacity from 92.1% a week ago, the Energy Department data showed. 

October reformulated gasoline closed higher by 3.49 cents at $2.016 a gallon, while October heating oil added 3.64 cents to finish at a record high of $2.2191 a gallon.    

OPEC takes action
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On Tuesday, crude-oil futures climbed even after the Organization of the Petroleum Exporting Countries decided to raise its daily output by 500,000 barrels per day, starting Nov. 1. OPEC said its new production target for 10 of its 12 members would be 27.2 million barrels per day. Its previous target was 25.8 million.        

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Prices have reached a record "without an actual supply disruption from a major hurricane weather event," said Person. And even "with an official increase in OPEC's production quota, the market did not flinch," he said. "This shows just how strong the underlying fundamentals are with the supply/demand outlook." 

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"To add more fuel to the fire, if the Fed does actually lower interest rates at next week's meeting this, in turn, could further stimulate the economy and heat up the demand for gasoline," he said.And "with the prospects for a colder winter, heating oil demand will certainly put pressure on the refineries to purchase more crude oil, thus keeping prices above the $75 for the next month," he predicted.


"The uncertainty about the economy is one of the main focuses of the oil market," Flynn said. "It seems that the oil market is starting to bet that we might not see as big of a demand drop as feared."

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