Crude soars past $59 a barrel amid supply fears
Crude oil soared into record territory above $59 a barrel on Monday on worries about supply and a lack of global refining capacity and concerns over security in Nigeria, a member of the Organisation of the Petroleum Exporting Countries.
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The $60 a barrel level is expected to be achieved in a couple of days, analysts said. The September Nymex contract was already at $60.03.
Kevin Drum had
a post yesterday with the list of reasons why oil prices are increasing:
So: the problem is that OPEC can't increase production; refineries can't increase production; there's no spare capacity; instability in Nigeria is causing panic; summer driving demand will be high; hedge funds are roiling the market; inventories are down; and fear of hurricane season is making everyone nervous.
In other words, no one has a clue what's really going on, so they're just tossing out every possible explanation they can think of. This is actually less unusual than you might think, since one of the peculiar little secrets of the oil industry is that no one actually knows what drives prices up or down. However, it seems to have reached pathological proportion in the past few weeks, and that's not a positive sign.
I think that he is wrong to dismiss this laundry list by saying that nobody knows what's going on. I think it is precisely the opposite: people realise that ALL the factors are pointing to price increases, and that's what's the most worrying - there is not enough oil, and mo spare capacity, which means that any random factor that modifies demand or supply (like strikes in oil producing regions, or unusual weather patterns that force consumption changes, or anything else) WILL have a disproportionate impact on prices. Today, all these impacts are upwards, because the simple fact is that supply cannot cope with demand.
According to the IEA (International Energy Agency, the rich countries' energy watchdog), oil demand will reach 86,4 mb/d at the end of this year when production was only 83,8 mb/d in the first quarter of this year.
Kevin Drum again
For what it's worth, I've ranked these explanations based on my guess of their importance. Basic supply problems (#1 and #2) are most important; razor thin spare capacity and related fears of sudden disruptions (#3 and #4) are next; and concerns about summer driving, winter hurricanes, inventory levels, and hedge funds are mostly just random noise.
The problem is that all random noises make the oil balance worse these days, so they are ALL relevant.
This is diary n°1 in my countdown to 100$ oil. Let's see how many I write until we get there... - take the poll.