Extra oil flow has no effect on record prices

At least half a million extra barrels of oil are expected to flow to markets each day in June – news that so far has done little to bring down prices from record-high levels.

Oil at close to $130 a barrel is worrying not just for consumers, but also for major oil firms and producer countries fearful of demand destruction and a potential price collapse. "The price is scary," a senior western oil executive said. "The market may be poised for a big drop, especially if the speculators exit in a hurry."

So far, the highest profile predictions have been for further price rises. Goldman Sachs, the most active investment bank in energy markets, earlier this week raised its forecast for oil prices in the second half of this year to an average of $141 a barrel.

Its research helped to push US crude to its latest record of $127.82, while traders ignored news the world's biggest oil exporter Saudi Arabia had been pumping an extra 300,000 barrels per day (bpd) since May 10 and would maintain production levels in June.

The market also dismissed higher export goals for Iraq, which aims to raise shipments by at least 125,000 bpd in June.

"What would it take to move prices down?" asked David Dugdale of MFC Global Investment Management. "The marginal cost of oil is about $80, but we're a long way from that." The marginal cost is the amount required to bring on hard-to-access oil only considered viable when other supplies fail to meet demand. It is a level below which prices are unlikely to fall.

Washington last week looked to an even lower floor when it approved legislation to stop the refilling of the US emergency stockpile until crude prices fell below $75 a barrel. The effect is to add around 75,000 bpd to the oil market.

On top of that and the extra Saudi and Iraqi crude, ship-loads of Iranian oil have been floating at sea for weeks awaiting buyers.

Members of the Organisation of the Petroleum Exporting Countries (Opec) have repeatedly said supplies are plentiful. Much of the surplus is also poor quality.

Most of the Iranian crude, which has been building up on vessels for around two months, according to shipping brokers, is very heavy and hard to refine.

When Iranian crude stocks last built up two years ago, the market impact was minimal.

The Iraqi and Saudi crudes, however, are relatively easy to refine and more bearish analysts point to the emergence of a market structure that if sustained could imply falling prices.

European benchmark Brent crude this month switched to contango, meaning prompt crude is cheaper than oil for later delivery, encouraging traders to build stocks further. US crude is still in backwardation, meaning the promptest oil is the most expensive, but the backwardation has narrowed.

"More supply is being made available to the market," Jakob said. "The physical reality is showing more in the timespreads (contango) than in the outright price... which remains in a world of its own."