OPEC Ups Capacity, Crude Climbs: Now What?

Light sweet crude continues to look to the sky as the price per barrel climbed beyond $56 mark in mid morning trades. The price stayed above $56 for a fair portion of yesterday. OPEC pushed their official ceiling and said they will consider producing more in the coming months. Oil prices continue to climb so what happens now?

The United States Department of Energy issued their weekly report yesterday. The report said oil inventories dropped 1.8 million barrels but was still up 26 million for the year. Gasoline dropped 900,000 barrels but gas is up 9.8 million barrels for the year.

In many ways a sigh of relief came though as distillate inventories climbed again for the 5th straight week by 2.5 million barrels and actually putting the yearly total on the plus side by 400,000 barrels. This certainly must be good news for consumers as heating oil prices start to lower ever so slightly and diesel prices should follow suit. Gasoline prices started moving up some this morning but are about even during midday trading.

According the report, there are two major schools of thought right now in the oil analyst business. One is that the oil problems will straighten out soon because crude oil is bottlenecked on refineries and demand will drop some when the problems are resolved. OPEC falls into this category right now.

The other school, which seems to be driving the speculation bubble is that oil demand will remain high worldwide for the coming months and that the world will barely be able to handle it particularly with regard to China and India.

MorganStanley economist Andy Xie sees things quite differently. In a report he recently prepared for investors, he warned China’s purchasing of oil is temporary and the oil “bubble” will burst very shortly.

“I believe China’s oil imports are likely to decline in 2005 and may fall further in 2006, as China’s investment cycle turns down,” said Xie in the report. “The economic fundamentals for oil look very weak at present and into next year.”

In any event, until that happens, prices at the pump continue to climb. Gas is up over a penny at the pump on average which may not seem like much, on the scale gasoline is purchased for everyone, it adds up to quite a bit. Plus, 50% of the cost of gasoline comes directly from the price of oil so, unfortunately, the price will go up. Some market watchers are looking for totals over $60 a barrel and in one instance over $100 a barrel.

With oil and gas continuing to climb, it should continue to slow the economy. Until a cheaper fuel source is used, consumers will continue to pay the exorbitant pump prices.

John Stith is a staff writer for Murdok covering technology and business.