Oil soars $2 a barrel
Dealers worry about strong global demand for diesel, and signals that OPEC can't rein in prices.


June 13, 2005: 4:04 PM EDT

NEW YORK (Reuters) - Crude oil surged 4 percent Monday as dealers worried that rising global demand for diesel would outpace refiners' ability to produce the fuel, and OPEC ministers signaled the cartel is powerless to rein in runaway prices with an output hike.

U.S. light crude for July delivery soared $2.08 to settle at $55.62 a barrel on the New York Mercantile Exchange, after a 1.4 percent slide Friday. London Brent futures, which fell more than $1 Friday, were $2.11 higher at $54.78 a barrel on the International Petroleum Exchange.

The strength tracked big gains in heating oil and gas oil futures as oil traders focused on surging world diesel consumption, which could leave consumers with tight distillate stockpiles ahead of the Northern Hemisphere winter.

Heating-oil futures, which are the benchmark for pricing distillates like diesel and jet fuel, jumped to a fresh two-month high, near $1.68 a gallon.

U.S. diesel demand over the past four weeks has run more than 6 percent higher than last year, according to the most recent government data, as the trucking industry moves Chinese imports to market from the West Coast.

Fresh data from Germany's oil-industry umbrella group showed Monday that German heating-oil sales were also up more than 50 percent in May compared with a year ago, while total oil products sales were up 13 percent.

"Diesel prices have been sustained by several factors, including strong global demand, extended refinery maintenance on upgrading units, and refinery disruptions in the Caribbean," Goldman Sachs said in a report.

Dealers have been concerned that refiners are ill-equipped to handle the strong growth in diesel demand while still upping production for gasoline during the summer driving season.

Opec hike
The Organization of Petroleum Exporting Countries signaled it was ready to hike its production ceiling by half a million barrels per day at its meeting Wednesday.

But the cartel acknowledged the move would likely not raise actual output because of a lack of spare production capacity and a shortage of refineries to run the crude.

"We are prepared to raise the ceiling," Saudi oil minister Ali al-Naimi said in Vienna ahead of the Wednesday meeting. "But where are the customers?

"You know and I know that what is driving the price is not supply. It's the lack of refining capacity worldwide."

OPEC is already pumping well above formal quotas, so any increase to the official quotas will merely legitimize current overproduction.

"The market accepts that OPEC is producing almost at capacity, and there is very little it can actually do to bring down prices," Rob Laughlin at Man Financial in London said.

Iranian oil minister Bijan Zanganeh said OPEC was helpless as it was producing very close to full capacity.

"We are worried about it, but we can't do anything," he said of the price. "Prices will remain high until 2006 or 2007, as there will be no excess capacity in the market until then."

The first tropical storm of the Atlantic hurricane season over the weekend left the offshore-oil industry mostly unscathed, with most oil companies saying they were resuming normal operations after brief production outages.