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Lloyds List: Record oil prices as refineries run flat out

Martyn Wingrove, Lloyds List
Published: Sep 24, 2007

SHELL and Saudi Aramco’s plant expansion decision comes at a time when refining capacity in North America is running flat out to meet growing demand, resulting in high refining margins and tight supplies.

This has helped push oil product and crude prices to record levels in the US and around the world, with crude trading over $81 a barrel last week after peaking at $84.10.

US oil product output is down this month, as key refineries such as BP’s Texas City and Whiting are running at low levels for prolonged upgrade work, and the Port Arthur refineries are coming back up after being closed for hurricanes.

This, and high oil product demand, has led to a drop in crude and distillate inventories to levels that traders fear are too low.

‘The extended tightening of the US oil market across the third quarter has continued unabated,’ said Barclays Capital analysts Paul Horsnell and Kevin Norrish in a report. ‘Crude inventories have fallen for the fifth straight week and oil product inventories have fallen for the sixth week.’

With the gasoline peak demand season waning and North America yet to move into the winter season, analysts expect refiners will be able to build crude and oil product stocks.

Tropical storm Jerry, the latest in the Gulf of Mexico, is expected to affect US coastal refineries this week and has already forced companies to shut down offshore production facilities over the weekend.

The US Minerals Management Service said almost a third of the region’s 1.3m barrels per day oilproduction capacity was closeddown ahead of the latest tropical storm.

US group Anadarko said it shut down 145,000 barrels of oil equivalent of daily production after closing its deepwater platforms Independence Hub, Constitution, Neptune and Marco Polo. Shell and BP also said they were shutting down production facilities.

US oil producers have benefited from $80 a barrel prices and refiners from high profit margins.

‘We have seen good refining margins this year and US Gulf margins are still reasonably strong,’ said Shell’s downstream director Rob Routs. ‘In the near term, margins will be good, but in the long term there is a lot of capacity coming on stream east of Suez so margins will come down.’

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