VIENNA: The Organization of Petroleum Exporting Countries is bracing for a sharp drop in crude prices in coming weeks, as huge reserves of oil-based fuels continue to pile up and the space to store them runs out.
Stockpiles of fuels such as diesel and heating oil are at a 24-year high in the U.S. because of tepid demand from industries and consumers hammered by the global economic downturn. Conditions in the futures market have also made it very profitable for traders to store these fuels, known as distillates.
So far OPEC has been able to head off a sustained collapse in oil prices through big production cuts, and U.S. oil prices have shrugged off the excess supply, taking their cue from rising stock markets and investors” expectations of an economic recovery.
But if the anticipated economic turnaround doesn”t materialize to soak up the growing distillate glut, as some OPEC officials fear, supplies will grow even larger, dragging down oil prices despite the cartel’’s efforts.
Crude rose 89 cents on Friday to $68.05 on the New York Mercantile Exchange.
When people realize there are no green shoots of recovery yet, “this distillate overhang will be a main factor pushing prices down,” a senior OPEC delegate said.
This concern is prompting some at OPEC, whose 12 members pump about four of every 10 barrels of oil consumed around the world every day, to consider further output reductions. The OPEC official wouldn”t rule out an agreement to cut production at the group’’s next policy meeting Sept. 9.
But any further announced cuts may not have much market credibility. Some OPEC members, including Angola, Iran and Venezuela, are already selling more barrels than they agreed to in order to capture more revenue. Some members, like Saudi Arabia, may have no appetite for more reductions when other OPEC nations are shirking their commitments.
Oil refiners may decide to process less crude to reduce inventories and increase their profit margins. There are already signs that U.S. refiners are throttling back production. For the week ended July 17, the nation’’s refineries ran at 85.8% of their capacity, down from 87.9% the previous week, according to government data.
Although refiners have been running their plants well below last year’’s levels for some time, the cuts haven”t been enough to offset dismal demand for diesel and other fuels. Last week, distillate demand dropped 15% from the same period in 2008.
Futures prices have also contributed to the build-up in U.S. fuel supplies. Prices for heating-oil deliveries farther out into the future have been sharply higher than prices for near-term contracts. The wide difference in prices, plus low interest rates, has encouraged traders to buy distillates, store them and enter into contracts to sell them in the future for a higher price.
“They”ve got huge forward premiums,” said Jim Ritterbusch, who runs an oil-trading advisory firm in Galena, Ill.
As a result, distillate stocks surged to 160.5 million barrels last week, 25% higher than during the same period last year and the highest level since 1985.
The enormous supplies are pushing available storage capacity to its limit, with some traders reportedly resorting to barges and tankers at sea.
“Inventories are at just ridiculously high levels,” said Kevin Rooney, chief executive of the Oil Heat Institute of Long Island, a trade group for heating-oil wholesalers. “I would imagine that just about every available barrel of storage is full.”
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