Crude rises to record

Beth Gardiner

Thursday, March 17, 2005 | 10:13 a.m.

LONDON -- Crude oil futures prices soared above $57 a barrel for the first time today after OPEC's pledge to increase output failed to assure traders who were worried about tight supply.

Light, sweet crude for April delivery rose 39 cents to $56.85 a barrel in early trade on the New York Mercantile Exchange, after reaching as high as $57.50 overnight.

Heating oil rose more than 2 cents to $1.6145 a gallon.

Brent crude also reached new highs, hitting $56.15 a barrel before edging back. In afternoon trading it was up 83 cents to $55.71 on the International Petroleum Exchange.

In a monthly report released today, the Organization of Petroleum Exporting Countries warned that economic growth in the United States, China and Japan would push demand for its oil even higher in the second half of this year. It also said it was unclear what impact the resulting price increases could have.

"Oil prices rose further in March and the capacity of consumers and companies to absorb such increases is a further uncertainty," OPEC said.

OPEC members meeting in Iran on Wednesday agreed to boost the group's output quota by 500,000 barrels a day, or 1.9 percent.

The market was unimpressed with the decision, because members of the oil cartel who are supposedly bound by its production quota are already exceeding the previous ceiling by about 700,000 barrels a day -- meaning no extra supply will actually be added.

OPEC President Sheik Ahmed Fahd Al Ahmed Al Sabah also said the additional barrels may not come until May, since members are already supplying more than planned.

"This is not about lowering prices. It's about stopping them skyrocketing," Yasser Elguindi of New York-based Medley Global Advisers said on the International Oil Daily Web site. "We are going to be either side of $50 with spikes to around $60."

Bruce Evers, an analyst with Investec Securities, said traders are convinced the announcement "won't be enough and it's going to leave the supply side of the equation very stretched."

With capacity so tight and demand expected to increase later in the year when winter hits, an unforeseen supply disruption -- like a bad hurricane season in the Gulf of Mexico or political instability in Nigeria or Venezuela -- could send prices even higher, he warned.

"Sixty (dollars a barrel) is question of when, not if," Evers said.

Simon Wardell, an analyst with the Global Insight consulting group, said "this is definitely a structural price change" driven by demand outpacing supply.

China, the world's second-biggest oil consumer after the United States. Chinese fuel use will rise 7.9 percent this year, or 500,000 barrels a day, to 6.88 million barrels a day, according to the Paris-based International Energy Agency.

The agency said last week it expects petroleum needs this year to increase 2.2 per cent, by 1.81 million barrels a day, to a new daily total of 84.3 million barrels.

Wardell said OPEC was producing almost all the oil it can pump. That means the upward price trend is unlikely to reverse unless demand slackens significantly, "which would mean a fairly sharp drop in economic growth," he warned.

Crude futures shot up more than US$1 a barrel Wednesday after the latest petroleum supply report from the U.S. government showed a sharp decline in domestic supplies of gasoline and heating oil last week.

In its report for the week ending March 11, the Energy Information Administration said gasoline stocks fell by almost three times more than expected, by 2.9 million barrels, to 221.4 million barrels, compared with consensus forecasts for an increase of 800,000 barrels.