Updated from 12:54 p.m.
Saudi Arabia's commitment to increase production was pushed aside by immediate supply pressures Monday as traders erased early losses and pushed crude oil prices above $41 a barrel to a record high in New York.
The benchmark U.S. crude closed up $1.79, or 4.3%, to $41.72, topping the previous record high of $41.55 on May 17 on the New York Mercantile Exchange. Gasoline prices closed up 4.1 cents, or 2.9%, to $1.458 a gallon, another NYMEX record.
Analysts said higher U.S. demand compounds existing world demand, stretching the market and making it vulnerable to short-term disruptions. That is exactly what happened Monday. News of reduced production because of a pipeline bombing in Iraq, a breakdown on Shell Oil's U.S. Gulf Mars drilling platform in the Gulf of Mexico, and a scheduled maintenance shutdown in Kuwait turned into a price spike as the market also reacted to the effect of a weekend fire at a Renton, Wash., gasoline pipeline.
Phil Flynn, chief trader at Alaron Trading in Chicago, said the disruptions showed how stretched supplies are, and how vulnerable the market remains despite the Saudi plan to make more oil available. That won't happen for about 40 days, he said.
"This shows how delicate the balance is between supply and demand," he said. This is the problem you get when inventories run so low -- you have nothing to fall back on and these little stories make these major moves in the market."
The Saudi plan, unveiled at a weekend meeting in Amsterdam between the Organization of Petroleum Exporting Countries and oil-consuming nations though first announced last Friday, would increase the kingdom's daily production to 9 million barrels a day, up from its current output of 8.3 million barrels.
"Even though the Saudis are too late, they did all the right things," Flynn said.
Jan Stuart, vice president of energy research at Fimat USA, agreed with Flynn and said the increase eventually will have a calming effect on the market, but not right away. "What the Saudis said is really quite significant, but there is some time to go between what they want to do and when it becomes meaningful in the market," he said.
At the weekend meeting, Saudi Arabia again urged its fellow OPEC members to increase production to prevent high prices from hurting global economic growth, but the cartel deferred any decision until its regularly scheduled meeting in Beirut on June 3.
The world's biggest oil exporter, Saudi Arabia, which first said it would increase production last Friday, now wants OPEC to increase production by 2 million barrels a day, having previously called for a 1.5 million-barrel-a-day increase.
OPEC said its members produced about 25.5 million barrels a day in April, almost 10% over the output official ceiling of 23.5 million barrels. There's considerable debate among analysts about whether many members have the capacity to boost production swiftly and produce more on a sustainable basis.
Flynn said non-OPEC producers such as Russia, Norway and Mexico have increased production by 1.17 million barrels a day from this time last year, with Russia providing the biggest boost. Non-OPEC producers now pump 50.1 million barrels a day, according to the International Energy Agency.
"Non-OPEC increases have really saved the world on oil prices," Flynn said. "We're very lucky we've seen those increases. Every extra barrel Russia produced went right to China."
Oil prices have repeatedly closed at record highs on the Nymex and came close to touching $42 a barrel. Traders are worried about supply because of recent attacks on oil-producing facilities in the Middle East ahead of the key summer driving season.
Gasoline prices are now above $2 a gallon in many parts of the U.S., which has raised questions about a dampening of consumer spending.
Domestic demand for gasoline will continue to keep prices high through the summer, because refiners who make gasoline from crude can still sell their product for nearly $60 barrel, keeping their profit margins high, said Tom Kloza, chief oil analyst at the Oil Price Information Service in Lakewood, N.J.
"Everyone thinks crude oil is determining the price of gasoline, when in fact it's the high gas prices that are tugging crude oil prices higher," he said.
Chip Hanlon, chief financial officer of Europacific Capital, an international investment firm in Newport Beach, Calif., said global demand would probably keep prices high. As China and India experience high economic growth rates, their energy needs are pressuring the world's oil producers, he said.
"The market reacted to the
Saudi announcement by looking and saying that it really doesn't change much about global supply and demand," he said. "That points to a long period of time of higher oil prices. If it were a stock, I'd say 'Wow, that stock could go to $50 in a hurry.'"
Recently, OPEC officials and some of its members have said the price spike is not their fault and that there is little they can do about the situation.
Saudi Arabia also indicated it was interested in boosting its future production capacity. The kingdom is now capable of producing about 10.5 million barrels a day and said it could achieve the 12 million-barrel level.
Flynn said that was critical to eventual price stability -- probably around $38 to $42 a barrel, because Saudi Arabia still has the greatest leeway for increasing production.
"OPEC had been very much behind the curve in terms of demand growth from Asia, and now they're trying to play catch-up," he said. "When you get that far behind the curve, it's very difficult to get things back under control in a short time. You're really at the whim of what the news is."