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Oil holds at 40 a barrel for 3rd day { May 13 2004 } Original Source Link: (May no longer be active)
http://www.reuters.com/financeNewsArticle.jhtml?type=businessNews&storyID=5130722http://www.reuters.com/financeNewsArticle.jhtml?type=businessNews&storyID=5130722
Oil Holds Above $40 a Barrel for 3rd Day
Thu May 13, 2004 05:32 AM ET
By Richard Mably
LONDON (Reuters) - U.S. oil prices held strong just under $41 a barrel on Thursday as concern that OPEC cannot meet the surge in demand fed by global economic expansion fueled speculation that $40-plus crude could be here to stay for some time to come.
Benchmark U.S. light crude in electronic trade rose to $40.84 a barrel from Wednesday's close of $40.77, the New York Mercantile Exchange's highest closing price in 21 years since it launched the contract in 1983.
By 5 a.m. EDT the price was down 27 cents at $40.50. The intra-day record stands at $41.15 a barrel struck in October 1990 after Iraq's invasion of Kuwait. London Brent in early trade eased seven cents to $37.88 a barrel.
The break above $40, in place now since Tuesday, represents blue sky for oil traders and could threaten an extended run of $40-plus crude, some analysts say.
Others think prices are far above the level justified by supply-demand fundamentals and expect profit taking by investment funds to send prices falling soon.
Prices found support from below-par Iraqi crude exports for a fifth day following a sabotage attack on Saturday on a pipeline near the Gulf port of Basra, highlighting fears about supply security in the Middle East.
Leading OPEC producer Saudi Arabia's attempt to cool prices by proposing an increase in cartel supply quotas so far has failed.
Prices have bounced back strongly after an initial drop on Monday when Riyadh made the announcement that it was seeking a rise in the cartel's official output limits of at least 1.5 million bpd.
"That suggests that there are some fairly powerful forces at work, and indeed the price response seems to represent the raising of a degree of skepticism about the ability of producers to counteract those forces," said Paul Horsnell at Barclays Capital.
OPEC SPARE CAPACITY QUESTIONED
The Organization of the Petroleum Exporting Countries will decide output policy on June 3 in Beirut and will discuss options at a forum for producer and consumer nations in Amsterdam on May 22-24.
With OPEC already pumping more than two million barrels a day in excess of official limits, traders say the proposed increase in quotas will do little more than legitimize existing production.
Spare capacity in OPEC is limited largely to Saudi Arabia, the United Arab Emirates and Kuwait and those three will need to open the taps to add real extra supplies.
But many other factors beyond OPEC's control are driving oil prices.
"This is not a spike in the oil price due to a single factor," said Horsnell. "Indeed, given the erosion in spare oil production capacity, the loss of flexibility in first U.S. and now increasingly global refining and the massive destabilization that has been created in the Middle East, $40 no longer look at all outrageous."
The U.S. government said on Wednesday that stocks of gasoline fell in the week to May 7 when forecasts were for a stock build. U.S. gasoline demand over the past four weeks is up 3.2 percent at 9.13 million bpd.
Other analysts think prices are overdue a correction.
"The Saudis have told customers there will be more oil, I don't know what else you need," said David Thurtell, commodities strategist at Commonwealth Bank of Australia.
Gasoline stocks are on the low side of what is seen as comfortable, but they're not critically low. Fundamentally, people definitely underestimated demand and the market is tighter than expected, but not $40 tight."
© Reuters 2004. All Rights Reserved.
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