Surge in U.S. Oil Inventories Takes Steam Out of Price Rise
Oil prices retreated on world markets Wednesday in the face of an unexpected surge in U.S. petroleum inventories and trader cautiousness over the stability of OPEC’s new production cutback agreement.
Oil prices had been soaring for two days following word that the Organization of Petroleum Exporting Countries’ 13 members had agreed on a way to sharply cut its aggregate production to boost prices.
The inventory report, released after the markets closed Tuesday by the Washington-based American Petroleum Institute, indicated that there would be less demand for new crude and refined products, given the increase of total supplies on hand.
The API figures showed that U.S. crude oil stocks had increased by 4%, or 14.6 million gallons, in the week ended Aug. 1, compared to the week earlier.
Stocks of heating oil and other distillate inventories were also up, by a hefty 6%, or 6.6 million gallons, while gasoline stocks were up marginally, the trade association reported.
“It was time for the momentum to wane anyhow,” said Madison Galbraith, an analyst at Merrill Lynch Energy Futures, on Wednesday. “But the API report did help curtail any more upward momentum.”
John O’Connell, an analyst at Refco Inc., a commodities trading firm, said that the increases had been expected but that the magnitude was “a little scary.”
Some Skeptical of OPEC Accord
William Byers, an analyst at Bear, Stearns & Co., said he believed that trading was also tempered by some skepticism over the OPEC agreement.
“People are not sure the production cuts will hold,” he said.
“I think this agreement is very real and that OPEC is going to be very pragmatic in trying to work out more permanent national output quotas,” said Sanford Margoshes, an analyst at Shearson Lehman Bros. in New York. “I’m looking for $20-a-barrel oil by the end of the year in a jagged but upward price pattern,” he said.
But Joseph Tovey, head of Tovey & Co., an investment banking firm in New York, expects oil prices to continue to decline.
“I’m not at all convinced that the accord is going to be very meaningful because of excess production capacity outside OPEC and intense economic pressure on OPEC’s poorer members to sell as much oil as they can,” Tovey said.
At the New York Mercantile Exchange, contracts for September delivery of West Texas Intermediate, the benchmark U.S. crude, closed at $14.97 per 42-gallon barrel, down 5 cents from Tuesday. That closing price had marked a $1.73-per-barrel gain over Monday’s $13.29 close, which itself was up $1.74 from Friday.
September contracts for refined products were mixed. Unleaded gasoline stood at 41.50 cents a gallon, up from 41 cents Tuesday and 36.88 cents Monday, while heating oil closed at 42.06 cents per gallon, compared to 42.79 cents Tuesday and 38.33 cents Monday.
Spot Market Prices Slip
On the U.S. Gulf Coast spot market, West Texas Intermediate slipped by 35 cents to $14.70 a barrel.
In London, contracts for September delivery of Brent crude, the main blend of North Sea oil, also declined, falling to $13.40 in late trading from $13.75 late Tuesday.
Traders attributed the decline to the API report.
Tuesday’s Brent crude price had risen from $10.20 late Monday.
Although the overall surge in prices is bound to raise retail energy prices in the United States--assuming that the higher wholesale levels take hold--analysts said it is too soon to say when consumer prices would rise and by how much.
The production quota accord was an effort by the 13-nation cartel to boost oil prices, which had fallen to levels between $7 and $12 last week from about $32 a barrel last November.
OPEC caused a price war last December when it dropped production quotas in favor of pursuing its “fair share” of the world market.
But in seeking to force cooperation in restraining output from major non-OPEC producers such as Britain and Norway, OPEC members also suffered economic distress. Prices plummeted as OPEC raised its production despite a glut on the world market.
Last week, the cartel’s output was estimated at about 20 million barrels daily, or about 3 million barrels a day more than the world can absorb.
In Geneva, the OPEC oil ministers agreed to shave off 3 million barrels a day from their current estimated total production of about 20 million barrels daily, removing the excess of unneeded oil entering the market every day, according to industry estimates.
Companies Hike Posted Prices
Meanwhile, several oil companies on Wednesday announced increases ranging from 50 cents to $1.40 in the “posted” prices that they will pay for various grades of crude oil.
Marathon Oil, a unit of USX Corp.; Citgo Petroleum, a unit of Southland Corp.; Conoco, a unit of Du Pont Co.; Diamond Shamrock, and Phillips Petroleum all said they were raising the price that they would pay for West Texas Intermediate crude by $1 to $12.25 per barrel.
