Consumers cringed in fear today as oil prices skyrocketed almost two dollars today. After hitting the $58.60 mark, it settled down to $58.47 for the contract set for July delivery. The previous record was set back in April at $58.28. It won’t stop there.
Gasoline futures settled up a nickle to $1.65 a gallon and heating oil remained static at $1.65. Brent crude in London for the August contract also traded up $1.75 to $57.87 a barrel.
The problems with oil prices right now are myriad. The first, immediate issue is Nigerian security problems. The U.S. received a threatening phone call today from suspected terrorists. As a result, the U.S. embassy shut down as well as several others in the area. OPEC member nation Nigeria is the 11th largest producer of oil in the world, the largest in Africa and the 5 largest importer of oil to the U.S.
This just demonstrates how tight oil production is right now. The slightest little thing and the prices spikes even higher. At the current rates of increase, $60 a barrel will probably hit early next week. Many experts, particularly OPEC, maintain there is plenty of crude on the market but the supplies are bottlenecked at refineries around the world.
The trader feeling seems to be there won’t be enough oil to fill supplies in the fourth quarter, when distillate demand climbs. They believe the production levels will remain tight for the coming months because OPEC has hit their peak for production, pumping all they can and big non OPEC nations like Russia seem winding down overall oil production, particularly after recent incidents surround Russian Oil company Yukos.
Many analysts are starting to predict and end to the oil spike though. Some like Morgan Stanley economist Andy Xie say China is working on a downward purchasing cycle and that Chinese imports have already dropped some and will continue to drop.
A recent energy conference sponsored by Canadian bank RBC seems to support this theory. Various industry executives see oil prices going back down to $35 a barrel in the next couple of years.
“The effects of rising oil prices on global economic growth and the demand for energy in China continue to impact the fortunes of the energy industry,” said Kurt Hallead, managing director at RBC Capital Markets. “While this trend will likely continue, concerns about terrorism have largely abated thereby substantially reducing the supply disruption premium.”
Oddly enough, as prices continue at record levels, consumer demand in the U.S. continues unabated. Demand is higher this year, with prices substantially higher than it was last year in both heating oil and gasoline. The laws of economics dictate the price will continue to climb until people can’t afford it anymore. The question is how far away is that time.
RBC sponsored a survey at the event. RBC said, based on those surveyed, gas would top out at about $2.60 a gallon. That’s still close to $20 to fill up the gas can for the lawnmower.
John Stith is a staff writer for Murdok covering technology and business.
