Crude oil rose the most in three weeks after the Organization of Petroleum Exporting Countries (OPEC) failed to reach an agreement on production targets for the first time in at least 20 years at their meeting in Vienna today (June 8), according to a report on Bloomberg.
Futures increased as much as 2.8% after Mohammad Aliabadi, the acting Iranian oil minister and current OPEC president, said the group will maintain current output for now. A Gulf delegate said yesterday that OPEC was going to raise quotas. A U.S. government report showed a bigger-than-forecast supply drop.
“The market is higher because OPEC failed to raise production today and we got a bigger-than-expected fall in inventories,” said Kyle Cooper, director of research at IAF Advisors in Houston. “You’re seeing the big reaction to the OPEC news because a quota increase has been expected.”
Crude oil for July delivery rose $2.59, or 2.6%, to $101.68 a barrel at 12:40 p.m. on the New York Mercantile Exchange. The contract is heading for the biggest gain since May 18. Prices are up 41% in the past year.
Brent crude oil for July delivery climbed $1.58, or 1.4%, to $118.36 a barrel on the London-based ICE Futures Europe exchange.
Saudi Arabian Oil Minister Ali Al-Naimi, representing OPEC’s biggest producer, said his country is ready to supply whatever the market needs.
“It was one of the worst meetings we’ve ever had,” al- Naimi told reporters. “We were unable to reach an agreement.”
Saudi Arabia, together with Kuwait, Qatar and the United Arab Emirates, were ready to supply more oil to the market, al- Naimi said. The four nations proposed a 1.5 million-barrel-a-day increase from the current 28.8 million. That would have meant an increase in output to 30.3 million barrels a day, he said.
Libya, Angola, Ecuador, Algeria, Iran and Venezuela were opposed to an increase, Naimi said.
“More oil is going to quietly come out of the Gulf,” said Rick Mueller, a principal with ESAI Energy, LLC in Wakefield, Massachusetts. “They are concerned about rising demand in the third and fourth quarters and don’t want to see the market starved and see prices rise to such a high level that they hurt economic growth.”
Global oil demand will climb to 89.18 million barrels a day during the third quarter, the highest level of 2011, the U.S. Energy Department said yesterday.
OPEC’s failure to agree to increase quotas shows that some of the group’s members have limited spare capacity, JPMorgan Chase & Co. said.
It will be a “stretch” for Saudi Arabia to add on its own the 1.9 million barrels a day of production needed to meet the 30.87 million demand OPEC forecasts for its oil in the third quarter, JPMorgan analysts including Lawrence Eagles wrote in a note today. The bank reiterated its forecast that oil will reach $130 a barrel this year.
“The knee-jerk reaction to the OPEC news is probably a little overdone,” said Carl Larry, director of energy derivatives and research with Blue Ocean Brokerage LLC in New York. “It does show that there’s dissension among the members. We’re trading more on the political implications of the meeting than any changes in physical oil supply.”
OPEC’s failure to reach a decision on targets shows Iran has increased its stature within the group, according to Petromatrix GmbH. Iran has replaced Saudi Arabia as the most influential member, Olivier Jakob, managing director of the Geneva-based research group, said today in an interview.
The U.S. fears that Saudi Arabia, the world’s largest crude oil exporter, may not have enough reserves to prevent oil prices escalating, according to confidential cables from its embassy in Riyadh.
The cables, released by WikiLeaks, urge Washington to take seriously a warning from a senior Saudi government oil executive that the kingdom’s crude oil reserves may have been overstated by as much as 300 billion barrels – nearly 40%, London-based The Guardian reported.
The revelation comes as the oil price has soared in recent weeks to more than $100 a barrel on global demand and tensions in the Middle East. Many analysts expect that the Saudis and their OPEC cartel partners would pump more oil if rising prices threatened to choke off demand.
However, Sadad al-Husseini, a geologist and former head of exploration at the Saudi oil monopoly Aramco, met the U.S. consul general in Riyadh in November 2007 and told the U.S .diplomat that Aramco’s 12.5 million barrel-a-day capacity needed to keep a lid on prices could not be reached.
According to the cables, which date between 2007-09, Husseini said Saudi Arabia might reach an output of 12 billion barrels a day in 10 years but before then – possibly as early as 2012 – global oil production would have hit its highest point. This crunch point is known as “peak oil.”
Husseini said that at that point Aramco would not be able to stop the rise of global oil prices because the Saudi energy industry had overstated its recoverable reserves to spur foreign investment. He argued that Aramco had badly underestimated the time needed to bring new oil on tap.
One cable said: “According to al-Husseini, the crux of the issue is twofold. First, it is possible that Saudi reserves are not as bountiful as sometimes described, and the timeline for their production not as unrestrained as Aramco and energy optimists would like to portray.”
It went on: “In a presentation, Abdallah al-Saif, current Aramco senior vice president for exploration, reported that Aramco has 716 billion barrels of total reserves, of which 51% are recoverable, and that in 20 years Aramco will have 900 billion barrels of reserves.
“Al-Husseini disagrees with this analysis, believing Aramco’s reserves are overstated by as much as 300 billion barrels. In his view once 50% of original proven reserves has been reached … a steady output in decline will ensue and no amount of effort will be able to stop it. He believes that what will result is a plateau in total output that will last approximately 15 years followed by decreasing output.”
The U.S. consul then told Washington: “While al-Husseini fundamentally contradicts the Aramco company line, he is no doomsday theorist. His pedigree, experience and outlook demand that his predictions be thoughtfully considered.”
Seven months later, the U.S. embassy in Riyadh went further in two more cables. “Our mission now questions how much the Saudis can now substantively influence the crude markets over the long term. Clearly they can drive prices up, but we question whether they any longer have the power to drive prices down for a prolonged period.”
A fourth cable, in October 2009, claimed that escalating electricity demand by Saudi Arabia may further constrain Saudi oil exports. “Demand [for electricity] is expected to grow 10% a year over the next decade as a result of population and economic growth. As a result it will need to double its generation capacity to 68,000MW in 2018,” it said.
It also reported major project delays and accidents as “evidence that the Saudi Aramco is having to run harder to stay in place – to replace the decline in existing production.” While fears of premature “peak oil” and Saudi production problems had been expressed before, no U.S. official has come close to saying this in public.
In the last two years, other senior energy analysts have backed Husseini. Fatih Birol, chief economist to the International Energy Agency, told the Guardian last year that conventional crude output could plateau in 2020, a development that was “not good news” for a world still heavily dependent on petroleum.
Jeremy Leggett, convenor of the UK Industry Taskforce on Peak Oil and Energy Security, said: “We are asleep at the wheel here: choosing to ignore a threat to the global economy that is quite as bad as the credit crunch, quite possibly worse.”
As the Memorial Day weekend kicks off the summer, this seasonal question is on the minds of travelers everywhere: Where are gasoline prices headed?
Don’t be shocked if they top $3 per gallon, but be pleasantly surprised if they drop to less than what you are paying now, according to a release from Purdue University, West Lafayette, Ind.
It all depends on how the economic principle of supply and demand reacts to conditions globally, says Purdue University agricultural economics professor Wallace E. Tyner, who tracks gasoline prices daily. He expects price fluctuations throughout the summer.
Tyner had predicted earlier this year that gasoline prices would run between $2.60 and $3.20 per gallon this summer in Indiana. His prediction is unchanged.
Although the national average price of regular unleaded gasoline last week was $2.79 per gallon — 35 cents higher than at this time last year — Tyner said prices have been “pretty stable” this year.
Key drivers of gasoline prices this summer, Tyner said, will be the value of the dollar, production levels by the Organization of Petroleum Exporting Countries (OPEC), political stability — especially in the oil-producing regions — and U.S. crude oil gasoline inventories.
The OPEC nations, which heavily influence world oil prices, have said they want the price of a barrel of oil to stay in the range of $60 to $80, which would keep gasoline prices to Tyner’s predictions if all other indicators remain stable. Just this week, however, the price rose from $68 to $75. Look for prices to rise next week if oil stays up, Tyner said.
In addition, consumers take more vacations in the summer, drive more and, as a result, use more gasoline. If the U.S. stock market rises and the economy continues to improve, demand for oil will increase, leading to higher prices.
A drop in the stock market would have the opposite effect.
“If the mood in the markets turns dour and economic growth prospects seem diminished, that will put downward pressure on oil prices,” Tyner said.
Here’s one rule to help you with a best guess on whether gasoline prices will go up or down: When the value of the dollar increases, as it has done recently, the price of oil falls. Conversely, when the value of the dollar falls, the price of oil tends to increase.
Indiana consumers no doubt noticed a swing of about 30 cents per gallon in gasoline prices in May.
“With the volatility in Europe, the U.S. dollar has been moving around quite a bit in the past few weeks,” Tyner said.
Despite the dismal economy, motorists may want to take to the road this summer. The federal government says gasoline prices are expected to stay relatively low, according to Associated Press.
The Energy Information Administration (EIA) today (April 14) projected regular-grade gasoline to average $2.23 a gallon during the April-through-September driving season. The monthly average is likely to peak at $2.30 a gallon. That’s still a bargain compared to last summer, when gasoline cost an average of $3.81 a gallon and soared for a time past $4.
The report also said U.S. crude oil production declined by 110,000 barrels a day last year because of Gulf Coast hurricanes, but should rebound by an additional 440,000 barrels to 5.4 million barrels a day this year, the first increase in domestic production since 1991.
In recent weeks gas prices have edged higher from their lows in December. Last week gasoline averaged $2.05 a gallon. The energy agency attributed the increases to slightly higher crude oil costs and refiners trying to recoup some profits.
The EIA report projects crude oil prices to average $53 a barrel this year, but to increase by about $10 a barrel in 2010. But it said a stronger-than-expected economic recovery, lower global production or “more aggressive action to cut production” by the OPEC oil cartel “could lead to a faster and stronger rise in oil prices.”
Despite the drop in crude prices as well as cheaper gasoline, U.S. consumption of petroleum products, mainly gasoline and diesel, is forecast to decline for a second year in a row because of the economic downturn, the report said.
It said consumption declined by 6.1% last year, compared with 2007, in part because of the high cost of fuel in the first half of the year, and is expected to drop another 2.2% this year, or by 430,000 barrels a day. An expected economic upturn will increase demand in 2010 by 1.4%, the report said.
There should be plenty of gasoline available this summer. Refinery production is projected to increase by about 240,000 barrels a day compared with last summer. Total gasoline stocks as of April 1 were slightly less than last year at this time, but higher than the five-year average.
More ethanol will be blended with gasoline this year, as required by law. The EIA said an average of 670,000 barrels a day of ethanol to be blended, compared to 635,000 barrels a day last summer.
Still, the EIA said the growth of ethanol plant capacity will slow dramatically in 2009 as lower gasoline prices depress profits in ethanol production and the constraints in the financial markets curtail plant construction plans.