Oil: Charges above US$67 on capacity worries

LONDON - Oil prices raced to record highs above US$67 a barrel on Friday as investors fretted over the world's strained capacity to refine and pump crude oil.
US oil rose more than 7 per cent this week and has climbed 51 per cent since the start of the year. The stage could be set for further gains, with no let-up seen in global demand growth and no signs that US$60-plus oil is harming the economy of the world's largest consumer, the United States.

US light crude settled US$1.06 higher at US$66.86, off the record US$67.10 a barrel hit earlier in the day. London Brent crude settled US$1.07 higher at US$66.45.

"The upstream and downstream constraints are real and long-term and we're seeing almost daily examples of them," said Michael Wittner, head of energy market research at Calyon.

"We're going to have a very strong price environment until the steam is taken out of demand or until investment catches up and restores a spare capacity cushion to production and refining." Supply limitations were underscored on Thursday by the International Energy Agency which cut its estimate of non-Opec supply growth. Non-Opec producers are failing to deliver as much oil as expected this year, leaving Opec to fill the gap.

That has not proved a problem so far, with global markets well-supplied on both crude and products.

Stocks held in OECD countries at 54 days of forward demand cover is one of the market's biggest bearish indicators, according to Calyon's Wittner. "But they are being overwhelmed, correctly, by the capacity constraints," he said.

REFINERY WOES

A new snag on Friday in the US refining system, this time at Premcor's 175,000 barrels per day (bpd) refinery in Tennessee, threatened petrol supplies.

The list of outages includes several units at BP's giant 460,000 barrel-per-day (bpd) refinery in Texas City, and the loss of capacity at ConocoPhillips refinery in Illinois.

Record-high pump prices appear to have had little impact on demand. US petrol futures hit a record high above US$2 a gallon, before settling just under that mark on Friday.

"There seems little standing in the way of the bullish euphoria," said Edward Meir of Man Financial.

Those high prices have yet to take a toll on the world's largest economy. Latest economic data showed US retail sales jumped 1.8 per cent last month, with the biggest gain in auto sales due to buyer incentives.

In real terms, stripping out inflation, oil is below the US$80 a barrel on average for the year after the 1979 Iranian revolution.

But at an average of more than US$53 for the year to date on US oil is up nearly US$23 on the average for 2003.

The diplomatic row over Iran's nuclear programme also underpinned prices as dealers feared the potential impact on supplies from Opec's second-biggest producer if the United Nations were to impose sanctions.

The European Union will push for Iran to be referred to the Security Council for punitive action if Tehran fails to suspend its nuclear activities.

- REUTERS