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By Jason Simpkins
October crude oil closed at $80.09 a barrel yesterday (Thursday) – the first close above $80 for a New York Mercantile Exchange futures contract.
Money Morning projected $80-a-barrel oil at the beginning of August [To read our investment-analysis article, “Is Crude Oil on a Flight to $80 Barrel?” click here]. And pricing pain in petroleum-related markets is likely to get worse before it gets better.
After first trading above the psychologically important $80-a-barrel level on Wednesday, oil prices dropped back – although the October futures contract for light, sweet crude oil still managed to close at a record $79.91. But then yesterday – with investor worries stoked by the uncertain backdrop of short supplies, refinery outages and looming Atlantic storms – crude oil prices soared again, with the October.
Despite the gains, oil is still well below inflation-adjusted highs hit in early 1980. Depending on the adjustment, a $38 barrel of oil in 1980 would be worth $96 to $101 or more today. But that’s little solace to consumers today.
But there have been many sources of concern that have sent oil prices steadily higher this week.
After the Energy Department released a report on Wednesday that warned of declines in both gasoline and crude-oil supplies and in refinery activity last week, crude oil briefly hit a record high and gasoline futures rose yesterday as refiners reported production problems after Hurricane Humberto hit Texas. Several refineries in the Port Arthur, Tex., area were shut due to a widespread power outage.
Amid swirling concerns regarding its supply, the price of crude oil closed at a record high on Tuesday at $78.21 a barrel. Factors that contributed to the price jump include an increase in global demand, the resumption of violence in Nigeria, and ongoing uncertainty involving the Middle East, particularly Iraq.
A recent report released by the Deutsche Bank AG (DB) suggested the demand for oil could increase 1.7% in 2008. The IEA has also suggested that 2008 demand for oil will rise by an average of 2.2 million barrels per day, up from the 1.5 million in 2007.
Much of that increase will no doubt be attributed to China whose oil demand is expected to rise as much as 5.6% in 2008. However the nation will also play host to the 2008 Olympic games, which will put an added strain on its energy consumption. According to the nation’s energy bureau, China’s crude oil imports increased 11.2% in the first six months of 2007.
Ongoing violence around the globe has also done its part to advance fears concerning a lack of supply. Political turmoil in Nigeria was credited for a rise in crude oil prices just a few months ago as hostilities between a rebel groups (Notably The Movement for the Emancipation of the Niger Delta) and the Nigerian government resumed. This resulted in an attack on a Royal Dutch Shell oilrig and the abduction of a 3-year-old British girl on her way to school in Port Harcourt.
Most recently, it was reported Tuesday that a Nigerian construction worker has been kidnapped. Nigerian oil production has fallen off by nearly 20% over the past two years as militants demanding control over the country’s oil revenue attacked facilities and abducted workers. This hasn’t boded well for the United States, which is the country’s biggest customer.
The Middle East has not been without its problems either, and with the prospect of an American withdrawal from Iraq becoming increasingly likely, the region is faced with the risk of becoming even-more unstable.
Also the U.S. dollar has suffered a significant decline in recent months, ultimately trading at a discount to the Euro. Therefore, oil imports priced with the U.S. dollar have been made cheaper to members of the European Union.
Many investors are also speculating that an inventory report from the Energy Information Administration due for release Wednesday will show a decline in U.S. oil inventories. All of this and the peak-driving season won’t even come to a close for another month. As fears regarding the supply of crude oil continue to mount its price will surely rise. It seems as though $80 a barrel could be a reality by summer’s end.
News and Related Story Links:
- Money Morning News Analysis:
Is Crude Oil on a Flight to $80 a Barrel?
- The Associated Press: .
Crude Futures Mark First-Ever Close Above $80.