August contract sweet crude traded up to a record $60 a barrel in trading today as the world begins to ponder where oil goes next. Some predict an oil bubble bursting but with countries like China pegged to increase its consumption the U.S. increasing consumption significantly over this time last year when prices were cheaper, no one knows exactly where this will stop.
The primary concern blasting up prices remains supply. Traders are terrified supplies won’t hold up under the increased demand and they’ve got some ammunition to back up their concerns. Even the U.S. maintains decades high inventories, consumption of distillate fuels and gasoline continue to climb.
In the weekly EIA report released yesterday, distillates rose significantly and gasoline rose slightly. Crude oil supplies dropped however and traders are worried that crude won’t be there to meet demand, particularly in the fourth quarter.
Right now, OPEC maintains the market has plenty of inventory and crude is bottlenecked at refineries. OPEC currently runs wide open. The only country with any production capacity left at all is Saudi. The additional oil they can get is deemed sour with a higher sulfur content and requires some different procedures to refine. Even then they can only grab 500,000 barrels or so.
The problem still seems to be a lack of supply for the future. Distillate levels climbed 7% in the last year and gasoline climbed 2.5%. If the summer in the U.S. continues to get hotter, as many predict, then consumption will continue to climb. China is also dealing with a brutally hot summer and many people are utilizing diesel-powered generators to keep their homes cool. This will keep distillate demand up through the rest of the summer. As the summer ends, then the normal heating oil season picks up and the race is off again.
Refineries will remain an important part of the puzzle though. Refineries run at near capacity and they must to remain profitable. While the U.S. hasn’t built a new refinery since 1976, many have expanded to accommodate demand and are much more efficient than they once were. The problems still remains though, that to meet the need they have to be able to do more and at this point, they are not and honestly, the oil companies, which own most of these refineries, probably won’t.
Finally, in all this mess, as oil prices continue to rocket, the oil companies are making record profits. Surprise. The oil companies make a money from refineries as they run at record levels. They also manage to arrange imports so they can keep their foreign refineries running at capacity. Then there’re the insane prices of the oil on the exchange. The large oil corporations win all around as the situation continues with no apparent end in sight. Goldman Sachs has predicted the price cracking $100 a barrel and that means pump prices some where around the $5 mark or so and that’s in the U.S. which has traditionally cheap fuel. When’s the price going to come down? Ask oil companies.
John Stith is a staff writer for Murdok covering technology and business.
