Supply concerns drive up prices

27 February 2004
The price of Brent crude held firm at $30.86 a barrel on 25 February ahead of a report on US fuel inventory data which was expected to show a fall in stocks of heating oil and gasoline. Crude stocks have, however, continued to build on the back of rising import levels. Product supply concerns were also heightened after the Royal Dutch/Shell Grouptemporarily closed its 340,000-barrel-a-day (b/d) refinery in Texas on 22 February due to a technical fault, and are likely to grow in the run-up to the US driving season.

Oil prices have been riding high since OPEC announced on 10 February that it was planning to cut production quotas by 4 per cent in early April and indicated it would eliminate surplus production over existing quotas at the first sign of a fall in prices. This would amount to a real cut of about 2.5 million b/d in total. Little action appears to have been taken since, but the stand-off has in itself helped to keep prices firm. OPEC is understood to be particularly concerned by the influence on the market of speculative investment funds, which have built up hefty long positions in crude and petrol futures.

However, analysts say that any attempt by the organisation to cut speculators out of the market is likely to be shortlived. 'Hedge funds are excessively long at the moment, but there doesn't seem to be evidence of any sales,' says Geoff Pyne of London-based Sempra Energy Trading. 'The main problem is that OPEC is trying to wrong-foot traders, saying one thing and doing another, and people catch on to it. If traders only have to look at one thing in the market now, it will be inventory numbers, and I imagine that could galvanise OPEC into making the cuts.'

There is little sign so far that OPEC has done anything to cut production for March, but Abu Dhabi National Oil Company (ADNOC) on 25 February said it would cut April crude contract volumes by 10 per cent. 'We are worried that prices will drop from end-March because of the [seasonal] fall in demand of between 2.3 million-2.4 million b/d,' OPEC president Pumomo Yusgiantoro said the previous day.

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