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Crude climbs to record on supply worries

From Bloomberg News

Crude oil rose to a record close of $78.21 a barrel Tuesday in New York on speculation that demand will outpace supply as refiners increase fuel production.

“There’s significant growth in global energy demand and production isn’t keeping up,” said Peter Schiff, an investment advisor and president of Euro Pacific Capital Inc. in Darien, Conn. “Prices have to rise because of this imbalance. I’m sure we are going to pull above $100 a barrel in 2008.”

Most analysts are somewhat less bullish than Schiff, even though oil remains hot among investors; bets on rising prices by hedge funds and other speculators rose to a record in July, according to U.S. Commodity Futures Trading Commission data.

In addition, global demand will climb 1.7% in 2008, showing no sign of slowing because of high prices, a Deutsche Bank report predicted. A government report today might show that U.S. oil supplies fell for a fourth week.

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Crude oil for September delivery rose $1.38, or 1.8%, to settle at $78.21 a barrel on the New York Mercantile Exchange, the highest close since trading began in 1983. Futures touched $78.28, the highest intraday price since reaching a record $78.40 a barrel July 14, 2006.

Oil in New York rose to a record last year on concerns that fighting in Lebanon between Israel and Islamic militia Hezbollah would spread through the Middle East.

“There’s a lot of speculative money in the market and it’s all weighed toward higher prices,” said Brad Samples, a commodity analyst for Summit Energy Services Inc. in Louisville, Ky. “They are latching on to anything that’s bullish, which at the moment is the prospect that crude stocks fell last week.”

Net long positions in crude oil futures held by speculators reached a record 112,287 contracts in the week ended July 10 on the Nymex, according to U.S. Commodity Futures Trading Commission data. Long positions are bets that prices will rise. Net long positions slipped to 108,782 contracts in the week ended July 24, according to the commission.

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“It’s hard to justify $78 oil right now,” said Eugene X. Hodge, a managing director at John Hancock Financial Services Inc. in Boston who manages a $4.3-billion oil and gas company bond portfolio. “You have to look at the speculators. The fundamentals don’t support these prices because there’s still plenty of oil out there.”

Crude oil supplies dropped 1.13 million barrels in the week ended July 27, according to the median of responses by 14 analysts surveyed by Bloomberg News before today’s report.

“The path of least resistance is up,” said Tom Bentz, a broker at BNP Paribas in New York. “Earlier this year the products led us higher but that’s no longer the case. Crude is now taking the lead as the crack has come in sharply.”

The profit margin, or crack spread, for turning crude oil into fuels is up 43% this year. It rose to $30.479 on May 17, the highest since at least 1989, based on closing futures prices in New York. The margin tumbled to $10.43 on Monday, the lowest since Feb. 16.

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Oil demand in China might increase 5.6% in 2008 with the potential for further gains because of additional energy use prompted by the Beijing Olympic Games, Deutsche Bank analyst Adam Sieminski wrote in a report dated Friday. China’s daily oil use will grow by 430,000 barrels a day to 8 million barrels next year, Sieminski wrote.


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