Crude oil prices jumped to a new high of US$60.46 in Asian trading yesterday amid concerns that supplies would not meet demand, especially in the US, the world's largest energy consumer.
After settling at US$59.84 a barrel Friday, the front-month August contract crude smashed through the psychologically important US$60 barrier in heavy Asian trading on the New York Mercantile Exchange, a jump of US$0.62 from Friday's close. In mid-morning trading, it was at US$63.43.
Other petroleum products followed crude's rise. Despite a traditional seasonal lull, heating oil was up nearly US$0.02 to US$1.6690 a gallon while gasoline surged to US$1.6623 a gallon.
Nymex crude had briefly touched the US$60 mark on several occasions last week before Friday's settlement price, the highest since futures began trading on the exchange in 1983.
"The psychology of the market is that once US$60 is breached, then there is tendency to test how much higher it can go, or how long US$60 can be sustained," said Victor Shum, petroleum analyst at Texas-headquartered energy consultants Purvin & Gertz in Singapore.
"There's a lot of speculative activity. It is a red-hot market," Shum said.
Oil prices are more than 60 percent higher compared to a year ago, but would still have to surpass US$90 to breach the all-time, inflation-adjusted high set 25 years ago.
Much of the worry surrounding crude is demand-driven speculation, analysts say, and it primarily surrounds how much supply there is currently and how much spare there is in the event of a production glitch.
With demand expected to average 84 million barrels a day this year, there is not enough of a supply cushion to shield the market from any prolonged output disruption. Excess production capacity is estimated to be about 1.5 million barrels a day, most of it in Saudi Arabia.
Another reason for trepidation among traders is the limited refining capacity in the US, which is increasingly reliant on imports of gasoline. Therefore, any glitch in the US refining system puts more strain on the global supply chain.
Still, record-setting prices have yet to cool demand for gasoline in the US, where consumption is up -- in a time when prices are 40 percent higher compared to a year ago.
"These high prices really have not significantly dented demand particularly in the United States market," Shum said. "US refineries in the past week have been running very full at 96, 97 percent. The refineries are processing crude, reducing inventories somewhat in order to maximize products."
Meanwhile, OPEC president Sheikh Ahmed Fahd Al Ahmed Al Sabah said over the weekend he has begun consultations with fellow cartel members as to whether to release another half million barrels into the market, but added they would monitor prices further first.
"I think we've got to wait for a while to see exactly what is the behavior of the prices, because until now it's not clear," said Al Sabah. "When you [keep] following the prices, they are moving up and down."
The Organization of Petroleum Exporting Countries raised its production quota by 500,000 barrels in the middle of this month, bringing the official output target to 28 million barrels a day. However, traders brushed off the move as insignificant as it would further deplete the cartel's razor-thin supply cushion and because its members were already pumping above the quota.