Oil barons set to reap winter windfall

Against the forecasts of many analysts, oil prices are once again touching $50 a barrel. The main reason given for this current rise is a cold snap in the United States.

    Oil market reaction to OPEC's December cut has been mixed

    But as we have seen before, that mass media

    version of reality may be not so real after all.

    There is no doubt that the weather in the US has some effect on oil prices. So far the American winter has

    been generally mild, but recently forecasts and temperatures have begun to worry traders.

    As cold weather

    has arrived in North Eastern USA, this has driven up the consumption of heating fuels, also known as heating

    distillates.

    This in turn depletes the reserves of heating distillates held at US oil refineries. These reserves are of course

    the quickest, fastest way to supply fuel to the US domestic market.

    When those reserves are run down

    (down 7% year on year, currently at five-year lows), they create upward, or "bullish", pressures on

    prices.

    Repeated pipeline attacks in Iraq
    are exacting a psychological cost

    The Iraq factor

    As a result, the cold snap and the forecasts for its continuation have created increased demand.

    Another reason currently given is the level of attacks on oil facilities in Iraq. This year alone there have been

    at least eleven major attacks reported in the first 14 days.

    All these attacks have been on oil pipelines and

    have resulted in the deaths of three private military contractors.

    The attacks have largely been in the north

    of the country around the Fatah pipeline complex close to Baiji. Other facilities south of Baghdad or further

    north near Kirkuk have also been attacked.

    Combined with cold weather and Iraqi pipeline attacks, some announcements from OPEC have also troubled

    market makers. The decision in December by OPEC to cut production by one million barrels per day (mbpd)

    have been met with a variety of reactions.

    Supply outages

    With a new OPEC meeting on the same day as Iraqi elections, 30

    January, the market is awaiting confirmation of production cuts with some trepidation.

    Added to this has been reports of unrest in Nigeria and storms in the North Sea forcing supply outages.

    Storms in the North are thought
    to have forced supply outages

    Hence one can see how the market generally accepts that supplies are once again too tight for comfort,

    pushing prices higher once again.

    However, all these generally accepted reasons for oil price rises hide some

    uncomfortable truths for the oil market.

    First, the lack of refining capacity in the US is not a matter of luck. It has been a matter of choice for US

    refiners for some time.

    "If the US petroleum industry doesn't reduce its refining capacity, it will never see any substantial increase in

    refinery margins," an internal Chevron document in November 1995 reported by the Associated Press said.

    Reluctant to store

    In 1996 a leaked memo from Texaco marked "highly confidential" said excess capacity was "the most critical

    factor" facing the US refining industry. This excess capacity was producing "very poor refining financial

    results".

    Dick Cheney himself has called for an increase in US refining capacity to force down prices. Yet in the last

    quarter century, no major refineries have been built in the US and many tens of smaller ones have been

    forced to close.

    "Cold weather is just one factor, but they all add up. But the lack of refining capacity is a long-term problem"

    Bruce Evers,
    Investec Bank, London

    Not only have US refiners chosen to cut capacity to increase their profits, but as oil prices

    rose in 2002 to the present day refiners have become even more reluctant to store excess capacity at such

    a high price.

    "It doesn't take much to disrupt the supply chain," Bruce Evers of Investec Bank in London told Aljazeera.net.

    "Cold weather is just one factor, but they all add up. But the lack of refining capacity is a long-term problem."

    As  Deborah White, senior energy economist at Societe Generale in Paris put it, refiners want "enough to fulfil

    their just-in-time operations". And no more.

    Holding expensive oil in storage makes no economic sense for

    refiners. As a result Americans and the world pay higher prices for their fuels while refiners make more money.

    No big change

    Iraqi pipeline attacks are also something the market only chooses to become obsessed with, as Aljazeera.net

    has previously reported.

    In the aftermath of the US election, repeated attacks on facilities and oil executives

    around the US election did nothing to halt a drop of prices from highs of $55 back down to $40.

    High oil prices are adding to Bush
    administration's economic woes

    "That is right," Frederic Lasserre, also of Societe Generale at the time, said. "The attention of the market is

    stocks, refineries and the winter temperature. The situation in Iraq is not a big change."

    Evers looks at the pipeline attacks as more of a "psychological problem" for the markets.

    He said, "The

    pipeline in the north (of Iraq) has been out of action repeatedly and the main one in the south is running on

    reduced supply until the summer, due to technical reasons which they won't elaborate on, but which could be

    power shortages."

    OPEC announcements are also far less important than they used to be. OPEC has long since lost the ability to

    control the upside of prices.

    The 11-strong producers' club has itself admitted that its quota-based output limits

    are routinely flouted by its own members.

    Production reality

    Production "cuts" announced by OPEC in December are seen

    by many as merely being methods of sustaining higher prices.

    "They (OPEC) are muttering about this production cut," Evers said. "If prices begin to sell off, then you could

    see cuts starting from around 1st March."

    "The attention of the market is

    stocks, refineries and the winter temperature. The situation in Iraq is not
    a big change"

    Frederic Lasserre,
    Societe Generale

    But the temptation to pump extra barrels when prices are high is seemingly too tempting for OPEC members

    to resist. As a result OPEC's meeting in Vienna on 30 January is likely to endorse the "cut" of  one million barrels per day (bpd) while

    the reality at production facilities, ports and refineries is likely to remain unchanged.

    As well as these somewhat hollow reasons the outages in Norway's 140,000bpd Daugen field have been

    restored. The production disruptions of Shell's controversial Nigerian fields, Belema, Santa Barbara, Ekulama I

    and Ekulama II, have also all ended.

    Price bonanza

    Supply lines are stretched while
    demand continues to increase

    So while reporters repeat statements from producers, refiners, OPEC, oil multinationals and their PR people,

    the underlying market fundamentals remain unchanged.

    Supply lines are stretched. Demand increases. Field

    depletion and an inability of producer nations to maintain maximum production for sustained periods are causing 

    price spikes.

    "The new (IEA) data was certainly a tick in the box for upside demand projections, but this rise is price is

    certainly a very interesting one," Evers says.

    Combine this with the desire of producer nations, refiners, oil princes and corporate giants to cash in on this

    "interesting" price bonanza and one starts to find the real reasons for $40 to $50 oil.

    For that select group of

    people, this winter looks set not to be a cold one but an intensely profitable one. For ordinary Americans the

    reverse could well be true.

    SOURCE: Aljazeera


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