NEW YORK (Dow Jones)--A quick look shows U.S. crude oil futures prices are lagging record year-ago levels by 5% while crude oil inventories are brimming at their highest early-July level in 14 years.
That snapshot might suggest that prices, which have held above $70 a barrel for the past two weeks, may be in for a steep slide.
But the regional issues surrounding the price of U.S. benchmark West Texas Intermediate crude oil for delivery at Cushing, Okla., mask a broader, far more bullish reality: Many refiners are paying record-high prices for increasingly tight supplies of sweet crude oil and even higher prices may lie ahead.
"Refiners are paying more for crude than last year due to more serious worries on supply and a fundamental tightening in the market," said Antoine Halff, an analyst at Fimat USA in New York.
Plagued by civil unrest in Nigeria and heavy field maintenance and operational problems in the North Sea, global output of low-sulfur crude is down about 1 million barrels a day from a year ago. The shortfall is especially acute as the so-called sweet grade is especially desired during the peak U.S. summer driving season, because of its high gasoline yield.
Surging demand for the premium quality crude has pushed spot-market prices for prompt supplies to record levels well above $80 a barrel and, analysts say, they're likely to go even higher.
The cash-market value of Light Louisiana Sweet crude on Friday was $80.72 a barrel, topping the previous record of $80.19 set Aug. 7, 2006, and 2.4% above the same day a year ago. On Monday, Nigeria's Bonny Light crude hit a record near $82.65, up 8% from a year ago.
North Sea Brent crude oil futures for August delivery on the IntercontinentalExchange eased back Monday after reaching an intraday high of $78.40 ahead of contract expiration, just 25 cents below the record-high settlement price hit last August.
Goldman Eyes $95 Crude
Analysts at Goldman Sachs (GS) on Monday projected that oil prices will spike above $90 a barrel this autumn, unless key OPEC producers Saudi Arabia, Kuwait and the UAE increase output by the end of the summer.
If members of the Organization of Petroleum Exporting Countries don't increase output, and "assuming normal weather conditions this winter, total petroleum inventories would fall by over 150 million barrels, or 6.5%, by the end of the year, which would push prices to $95/bbl without a demand response," Goldman analysts said in their report.
"Even accounting for a strong impact of such a price rise on global oil demand and a possible slowdown in global economic growth, our estimates indicate that oil prices would still spike to $88/bbl," the report said.
A different Goldman analyst set the market abuzz with a March 30, 2005, assessment that, "oil markets may have entered the early stages of a 'super spike' period," which the analyst predicted could drive prices toward $105/bbl without impacting demand.
That widely misinterpreted report stated that prices could reach that level by the end of 2007 without "meaningfully" reducing energy demand.
To date, the essence of that report is running true. U.S. benchmark crude was $54 when the 2005 report was published and in 2005 and 2006 together averaged $61.39, against an average forecast of $62.50, without blunting demand.
Now, global crude oil output is more than 1 million barrels a day below year-ago levels, while demand is up more than 1 million barrels a day, Goldman said.
In the U.S., the world's largest oil consumer, regional anomalies are causing a divergence from the global trend. Heavy refinery maintenance and operational problems have caused distortions in inventory patterns and prices.
Nigeria, Norway Supply Cuts
Crude oil stockpiles in the Gulf Coast refining region have surged to record levels as refinery operations have lagged typical levels.
Despite the record high stocks, prices are buoyant. Growing demand for sweet crude has widened price differentials for grades delivered outside of the Cushing, Okla., hub. Values of Light Louisiana Sweet crude averaged $5.63 a barrel above WTI-Cushing levels in the second quarter, according to ConocoPhillips (COP), nearly four times the average a year ago of $1.48 a barrel.
Civil unrest in Nigeria is a huge part of the reasonthat sweet crude prices are soaring. Nearly 1 million barrels of Nigerian crude was shut-in in recent months by unrest in the Delta producing region, with about 600,000 barrels a day still out, according to analysts' estimates. Nigeria supplies about 10% of U.S. crude oil imports and is the nation's fourth-biggest source of foreign crude.
The energy watchdog for the major industrialized nations, the Paris-based International Energy Agency, said in a report Friday that due to continued unrest, it was dropping some 545,000 barrels a day of shuttered Nigerian oil production from its capacity estimates for 2007-08 and beyond, effectively capping output at its 2005 level of 2.4 million barrels.
Further slashing supplies of light, sweet crude, heavy maintenance cut Norway's output to 1.88 million barrels a day in June, a 16-year low.
Analysts said further upward pressure on prices is expected in coming weeks as U.S. refiners return facilities to more normal levels, taking a hefty bite out of crude inventories.
While the IEA and some analysts are calling for more OPEC crude, the group's leaders insist there isn't any need for the group to consider changing its output-restraint policy before its scheduled Sept. 11 meeting.
No Spare Sweet Crude
Ali Naimi, oil minister of Saudi Arabia, the world's largest oil exporter, said last week that current high prices aren't based on crude market fundamentals, but are due to geopolitical worries and refinery bottlenecks.
Naimi also said that commodity fund investments are helping drive up crude oil futures prices, a claim borne out by latest U.S. data which shows large speculative investors have their biggest-ever net long position in Nymex crude futures, betting heavily on rising prices.
Naimi noted that crude oil inventories are "very, very comfortable" at their highest levels in five years.
"Nobody is looking for additional crude now," Naimi contends, but that's true because OPEC and others have only extra heavy, high-sulfur sour crude - not the desired light, sweet grade - to offer.
"Supply hasn't grown as much as expected or as much as demand," said Fimat's Halff. The unmet demand, which may ease somewhat after the peak gasoline season, is for sweet crude, he said, "and OPEC doesn't have the sweet barrels."
Source: David Bird, Dow Jones Newswires; 201-938-4423; david.bird@dowjones.com (David Bird is senior energy correspondent for Dow Jones Newswires.)