Reasons behind high oil prices

There is substantial evidence that the large amount of speculation in the current market has significantly increased [oil] prices according to some US senate reports.

On May 13, the price of a barrel of oil briefly hit a record of $126.98 on the New York Mercantile Exchange. The reason was ostensibly that Iran was cutting oil production. But there is no gas shortage. So why are prices still going up?

During a high powered meeting influential and knowledgeable CEOs reached the consensus that “oil prices will likely soon drop dramatically and the long-term price increases will be in natural gas.” Of course, despite the pedigrees of those in attendance, their forming a consensus on the direction of energy prices does not mean that it’s written in stone or is even going to happen. The group is clearly bullish on natural gas. But petroleum keeps getting more expensive.

The energy executives’ prediction about the future price for crude oil had sound backing. Just a few days earlier, Lehman Brothers (LEH) investment bank had said that this current oil pricing boom was quickly coming to an end. Oil supply is outpacing demand growth. Inventories have been building since the beginning of the year. The Saudi Khursaniya field has just opened, with 500,000 barrels a day of production, and the new Khurais field will start next year with a further 1.2 million b/d [barrels a day].”

In the US alone, stockpiles of oil climbed by 11.9 million barrels in the month preceding the Energy Information Agency’s (EIA) May 7 inventory report; they were up by nearly 33 million barrels since January 1. At the same time, MasterCard’s (MA) May 7 gasoline report showed that gas demand has fallen by 5.8%, while the government suggested that gasoline consumption might have fallen by slightly over 6%.

Refineries in the U.S. again cut back their utilization to 85%. That’s down from 89% a year ago, in a season when production is normally 95%, only because they’re trying to draw down gasoline inventories to bid gasoline prices up. Yet despite the reduced refinery runs, US managed to put another 800,000 barrels of gasoline in stock. The American Petroleum Institute put the gas gain at 1.4 million barrels. The point is that neither organization is in disagreement that gasoline was added into active stocks; it’s just a question of exactly how much.

US oil demand is expected to decline by 190,000 b/d in 2008. Chinese consumption is expected to rise this year by only 400,000 b/d (barrels per day) hardly the “surging oil demand” usually blamed on China in the media. Last year China imported 3.2 million barrels per day, and its estimated usage was around 7 million b/d total. The US, by contrast, consumes around 20.7 million b/d.

another British report says oil in transit on the high seas is quite strong; almost every category of shipment is running higher than it was a year ago. The one exception was oil shipments to the West during the previous 30 days. In the West, a big share of any [oil] stock building done this year has happened offshore, out of sight. Oil in temporary floating storage offshore is hard to pin down, and there is no useful info on that. Whenever this happens it generates market noise-and there is none.

Goldman Sachs (GS) announced that oil could in fact be on the verge of another “super spike,” possibly taking oil as high as $200 a barrel within the next six to 24 months? This could be due to “blistering” demand from China and the Middle East, The Middle East is nearing its maximum ability to produce more oil. As for the Middle East being tapped out on oil production, there might be one more thing to consider.

Iran is again storing its heavy crude on tankers in the Persian Gulf because the country has run out of onshore storage tanks while awaiting buyers. Further, Saudi Arabia has extended discounts on its sour crudes to $7.45 for Arabian Heavy. It doesn’t sound like there is any real supply problem with that grade of crude.

Leave aside all expert reports as an outsider and management observer we can say that though oil demand has increased oil producers are slowing down on production to reap more margins. Until and unless the International developed countries come out with all possible development of non-conventional energy sources and slow down the demand for crude oil this game of oil prices keep going north. Non-conventional energy sources can include Nickel Cadmium Batteries charged by solar cells or electricity for automobiles, Solar energy for taking part of electricity load. This can work in countries even if 250 days of Sunlight is available during a year.