Bloomberg August 1, 2005
Oil Surges to Record as King Fahd's Death Raises Supply Concern
By Mark Shenk
Aug. 1 (Bloomberg) -- Crude oil rose to a record $62.30 a barrel after the death of Saudi Arabia's King Fahd heightened concern about the stability of the world's largest oil exporter.
The monarch's half-brother Abdullah bin Abdulaziz al-Saud who assumed day-to-day power after Fahd's 1995 stroke, becomes king. Prince Sultan bin Abdulaziz, minister of defense, becomes crown prince. The kingdom is battling al-Qaeda, which has killed almost 100 foreigners in the country during the past two years. Prices also rose on refinery disruptions in the U.S. and Europe.
``This lays bare the fact that there's a succession problem and it's an opportunity for al-Qaeda to make trouble,'' said Bill O'Grady, assistant director of market analysis at A.G. Edwards & Sons in St. Louis. ``Abdullah and Sultan are both about 80, so we can't expect them to sit on the throne after five years.''
Crude oil for September delivery rose $1, or 1.7 percent, to close at a record $61.57 a barrel on the New York Mercantile Exchange, according to the Nymex Web site. Futures touched $62.30, the highest intraday price since trading began in 1983. The previous record, $62.10, was reached on July 7.
In London, the September Brent crude-oil futures contract rose $1.07, or 1.8 percent, to $60.44 a barrel on the International Petroleum Exchange, the highest close since the contract was introduced in 1988. Brent touched $60.98 an intraday record.
Prices rose in 1974 after an oil embargo that followed the Arab-Israeli war and from 1979 through 1981 after Iran cut oil exports. The average cost of oil used by U.S. refiners was $35.24 a barrel in 1981, according to the Energy Department, or $75.44 in today's dollars.
`Dinosaur State'
``Saudi Arabia is a dinosaur state,'' said Anthony Harris, formerly the U.K.'s ambassador to the United Arab Emirates, Saudi Arabia's Persian Gulf neighbor. ``It can't be good for a country to be ruled by leaders in their 80s,'' Harris said.
Crown Prince Abdullah was born in 1924, according to the Web site of the Saudi embassy in Washington. He's been heir- apparent since his half-brother became king and previously was commander of the National Guard, a tribal force loyal to the al- Saud family. Abdullah will be crowned Wednesday, a Royal Court spokesman said on state TV.
Sultan was born in 1928, according to GlobalSecurity.org, an Alexandria, Virginia-based organization that tracks global security issues.
`Easier Time'
``Abdullah is now king, not the crown prince, so he should have an easier time carrying out his policies,'' said Mordechai Abir, director of energy research at New York-based Burnham Securities Inc., in a telephone interview from Jerusalem. ``By immediately appointing Prince Sultan as crown prince, Abdullah managed to avoid a struggle for power, which would have split the royal family.''
Saudi Arabia is the largest producer in the Organization of Petroleum Exporting Countries, which supplies about 40 percent of the world's oil. The kingdom sits on about 25 percent of the world's proved oil reserves.
Economic growth in the two largest oil consumers, the U.S. and China, has pushed prices to records. The U.S. consumes 25 percent of the world's oil.
U.S. Manufacturing
U.S. manufacturing accelerated for a second straight month in July as gains in both orders and production signaled that factories may add more to economic growth this quarter, a private survey showed. The Institute for Supply Management said today that its factory index rose to 56.6 in July, the highest this year.
``Until we have solid evidence of a weakening of the U.S. or Chinese economy there will not be a significant lowering of prices,'' O'Grady said.
A spate of refinery disruptions in the U.S. and Europe has also pushed prices higher.
Exxon Mobil Corp., the largest publicly traded oil company, shut its Joliet, Illinois, refinery on July 30 because of a failure of the water cooling system, a company spokeswoman said. The company is making repairs and assessing options to resume operation this week, spokeswoman Prem Nair said in an e-mail. The facility has the capacity to process 238,000 barrels of crude oil a day.
BP Plc said the maintenance shutdown yesterday of a unit at its Texas City, Texas, refinery was not related to an explosion three days earlier. BP shut the number 2 fluidized catalytic cracking unit at its 460,000 barrel-a-day refinery yesterday for maintenance.
Refinery Problems
``There have been a number of problems at refineries recently which will keep utilization rates below where they should be at this time of year,'' said Marshall Steeves, an analyst with Refco Inc. in New York. ``You won't see gasoline or heating oil prices retreat until some of these problems are fixed.''
Gasoline for September delivery rose 2.1 cents, or 1.2 percent, to $1.7471 a gallon in New York, the highest close since July 13. Futures reached a record $1.86 on July 8. Heating oil for September delivery rose 4.07 cents, or 2.4 percent, to $1.7169 a gallon, the highest close since July 13. Futures reached a record $1.8125 on July 7.
© Copyright 2005, Bloomberg L.P.
