Oil prices drop on signs of falling Asian demand

Oil prices fell more than US$2 yesterday.

The drop extended a slide from the previous session, amid growing signs that Asian demand could start to falter as countries look to cut subsidies by raising local fuel prices.

United States crude had fallen US$2.02 to US$126.83 a barrel by 0855 GMT (4.55pm in Singapore), after dropping US$3.34 on Tuesday, and taking losses from last week’s record high of US$135.09 to nearly 6 per cent.

Meanwhile, London Brent crude was down US$1.69 at US$126.62 a barrel.

Earlier yesterday, a research paper released by International Monetary Fund economist Noureddine Krichene stated that there was no reason to expect oil prices to decline soon.

The paper said ‘prudent monetary policy’ may be needed to stabilise the oil market. ‘Short-term forecasting would imply persistence of observed trends,’ it added.

‘Given explosive trends in prices of other commodities, depreciating currencies and weakening financial conditions, recent trends in oil prices might not persist further without triggering world economic recession.’

The decline came in the face of supply problems in Mexico and Nigeria that could have driven oil prices higher. That is an indication that demand concerns are weighing on the market and giving investors reason to pull back from the record-high oil prices, analysts said.

Oil has also been knocked off its peak by growing evidence that consumers are struggling to cope with surging prices.

Demand for oil in the US, the top consumer, and other developed countries has been under pressure, and signs are emerging that this trend could spread across Asia as governments in the region take the knife to subsidies.

‘There are signs that soaring energy prices are now starting to cause ripples even in the booming Asian economies,’ said Mr Edward Meir at MF Global.

Mr Michael Lynch, the president of Strategic Energy & Economic Research in Massachusetts, thinks that energy investors are selling because of recent data showing Americans are driving less as a result of high prices.

Price above US$135 on supply worries

Oil galloped to a high above US$135 a barrel yesterday, extending this month’s near 20 per cent rally after a sharp drop in US crude stocks and the weakening greenback triggered buying by investors.

The climb in prices, which have marked new record highs in 10 of the last 14 sessions, has set off alarm bells around the world, although the Organisation of Petroleum Exporting Countries has maintained that the market remains well supplied with crude and that prices are beyond its control.

The US July crude contract extended Wednesday’s more than US$4 surge to reach a high of US$135.04 early yesterday. By 0729 GMT (3.29pm Singapore time), it was trading up US$1.17 at US$134.34 a barrel.

US crude stocks fell 5.4 million barrels to 320.4 million barrels last week, counter to expectations of a small rise in inventories, intensifying concerns about supplies at the world’s biggest consumer just ahead of the start of summer.

Several analysts said the latest step higher in prices had come after companies or traders who sold the market short scrambled to buy back their positions.

Recent bearishness towards the US dollar added momentum to the oil market. The greenback was pinned at one-month lows against the euro after the Federal Reserve cut its growth forecasts for this year.

Oil sets new high for fifth straight day

Oil prices leapt to a new peak of more than US$126 a barrel yesterday, hitting a record for the fifth straight session, in a market given an additional spur by tight supplies of diesel.

United States crude for delivery next month rose as much as US$2.51 to US$126.20 a barrel. London Brent crude rose US$2.81 to US$125.65 per barrel.

Wall Street opened sharply lower, in response to the latest hike and news that insurance giant AIG had reported a deeper-than-expected quarterly loss.

At 11pm Singapore time, the Dow Jones Industrial Average was down 89.56 points at 12,777.22.

‘I’m not particularly surprised by the speed of the rise in crude. There are many market bulls hoping for prices to rise heading into the summer,’ said Mr Tetsu Emori, a fund manager at Astmax in Tokyo.

Gains in US crude picked up momentum after distillate stocks in America, notably diesel, fell.

The US said on Wednesday that domestic distillate stocks, which include diesel, fell by 100,000 barrels last week, against forecasts for an 800,000-barrel rise.

The tightness in the stocks was also highlighted after Royal Dutch Shell looked set to shut its second-largest crude distillation unit and two secondary units at its Singapore plant next month for routine maintenance.

Oil rises to US$122 on fresh supply fears

Oil set a new record high of US$122 a barrel yesterday, the latest spurt in an advance that has seen prices double over the past 12 months.

Supply disruptions in Nigeria, where a strike and attacks by militants have hit production, helped boost a market that is nervous about any threats to supply.

Adding to the tense climate was Iran, the world’s fourth-biggest oil producer, when it refused to accept intrusive inspections of its nuclear programme, which the West fears could be linked to weapons.

US light crude for June delivery rose as much as US$2.03 to US$122, while London Brent crude climbed US$2.36 to a record US$120.35.

Goldman Sachs has predicted that oil could soar towards US$150 to US$200 a barrel because of a lack of adequate supply growth.

‘The possibility of US$150 to US$200 per barrel seems increasingly likely over the next six to 24 months, though predicting the ultimate peak in oil prices as well as the remaining duration of the upcycle remains a major uncertainty,’ the bank said.

Oil has nearly doubled in the past year and is up by a quarter since the start of this year, partly because of the problems in Nigeria, as well as weakness in the US dollar, which has boosted the price of commodities.

Oil price close to US$120

By Jessica Cheam, ST

Crude oil hit a new record of nearly US$120 a barrel yesterday as a workers’ strike closed a major British oil pipeline and fresh violence in Nigeria reignited supply fears.

Rationing is already being enforced at some British outlets amid panic buying.

Soaring oil prices are hurting Singapore car drivers at the petrol pump, just as they are adding to corporate costs around the globe – fuelling growing inflation fears.

The question on everyone’s lips now: Just how high will oil prices go?

Experts and other oil industry figures are split. Some say it could hit US$200 a barrel, but others expect the price to ease to an average of US$95 a barrel this year and the next.

Still, the latest developments are adding to the jitters.

Oil for June delivery rose as much as US$1.41, or 1.2 per cent, to US$119.93 a barrel in after-hours electronic trading on the New York Mercantile Exchange yesterday – the highest since futures began trading in 1983, reported Bloomberg.

The contract eased back to US$119.04 a barrel by noon in Europe, up 52 US cents from last Friday’s close of US$118.52.

The shutdown of one of Britain’s biggest oil refineries over a pension-row strike was expected to prompt more panic buying of petrol yesterday as motorists, particularly in Scotland and northern England, rushed to pumps to stock up.

Also in Nigeria last Friday, the key armed group in the southern oil-producing region sabotaged a supply pipeline owned by Shell.

In a report last Friday, Mr Adam Sieminski, Deutsche Bank’s chief energy economist, said there was a huge risk that oil price ‘will escalate until it gets to some level when demand finally collapses because ordinary people can no longer afford to burn as much energy as they are burning now’.

Organisation of Petroleum Exporting Countries (Opec) president Chakib Khelil reportedly does not rule out oil hitting US$200 a barrel even with adequate supply.

At a seminar at the National University of Singapore yesterday, Professor Sam Ouliaris of the economics department had a more conservative estimate. He sees average oil prices at about US$95 a barrel for this year and the next, and cited several key reasons for the recent hikes: tight supply, disruption of oil facilities, Opec’s limited excess capacity, and the declining US dollar, in which oil contracts are priced.

Speculative activity by hedge funds – lured to commodities trading because of the volatility of equity markets and low interest rates – has also contributed to the price hikes, he added.

Prof Ouliaris, a former senior International Monetary Fund researcher, added that consumption in growing major markets such as China and the Middle East is driving up prices. But he said the recent oil price shocks are ’small, relative to those in the 1970s’.

For hikes to have the same impact as they did in the 1970s, when oil rose from around US$3.50 a barrel to US$35, current prices would have to hit US$250 a barrel in 2010 to 2013, said Mr Sieminski in his report.

Standard Chartered Bank economist Alvin Liew, however, puts oil prices slightly higher at about US$104 a barrel for this year.

‘I think we can see an easing of demand in the second half of the year. If the US is indeed in a recession, demand will fall accordingly,’ he said.

Prof Ouliaris added that a long-term solution is to minimise the growth in consumption, particularly in the transport sector, as oil supplies are likely to remain tight.

‘In the meantime, get used to high oil prices,’ he said.