- The Washington Times - Wednesday, August 18, 2004


The price of oil charged to a new high above $47 a barrel yesterday amid nagging concerns about instability in Iraq, the uncertain fate of Russian petroleum giant Yukos and the world’s limited supply cushion.

Still, analysts pointed to recent developments in Iraq, Russia and Venezuela that could help temper the overriding fears that have fueled a 27 percent run-up in oil prices in just six weeks.

“There are some signs that things are getting better,” said Tom Bentz, a trader at BNP Paribas Futures in New York.

“But the market is still in a very bullish mode,” he added.

U.S. light crude for September delivery settled at $47.27, up 52 cents, on the New York Mercantile Exchange. It was the highest Nymex settlement price on record, although when adjusted for inflation oil still costs about $10 less per barrel than it did leading up to the first Persian Gulf war.

“At the heart of why we are higher is that demand does usually grow at a steady basis from now until January and there is no great cushion of available supply,” said Peter Beutel, president of Cameron Hanover Inc., a New Canaan, Conn.-based energy consultancy. Mr. Beutel said the market is also being pulled higher by its own momentum — “the $50 level is acting like a magnet.”

However, he said events in Iraq and Russia yesterday provided a ray of hope that worst-case scenarios could be averted and that increasingly tight oil supplies could be sufficient to satisfy the growing global appetite.

“There are plenty of factors that would suggest that we need a major correction right now,” Mr. Beutel said.

• Rebel Shi’ite cleric Muqtada al-Sadr accepted a peace plan yesterday to end fighting in Najaf, Iraq.

• Officials at Russia’s rail transport monopoly said China has agreed to step in and pay transportation fees to ensure that it continues to receive Yukos oil if the company is unable to cover the costs.

• And Venezuelan President Hugo Chavez survived a recall vote Sunday, decreasing the likelihood of turmoil within the ranks of the state-run oil company.

But traders appeared to cling to the signs of uncertainty that remain in each of these countries.

For example, they remained circumspect about Iraq because a previous cease-fire with Sheik al-Sadr’s militia collapsed two weeks ago into street battles throughout the city, and clashes continued yesterday.

Forces loyal to Sheik al-Sadr had earlier in the month threatened to blow up crucial oil pipelines, prompting a temporary stop to the flow of crude. Before the latest round of violence in Najaf, Iraq had been exporting roughly 1.7 million barrels of oil per day, although volumes have fallen recently to about 900,000 barrels per day, according to a source within the Organization of Petroleum Exporting Countries who spoke on the condition of anonymity.

Traders were anxious, too, about the oil supply in Russia, where Yukos is on the brink of bankruptcy as a result of the government’s efforts to collect $3.4 billion in back taxes. The legal battle against Yukos, which pumps about 1.7 million barrels a day, has caused some alarm that productivity might suffer, although there is currently no evidence supporting this, analysts said.

And the market was still wary of potential unrest in Venezuela, the world’s fifth-largest exporter, as opposition leaders refused yesterday to participate in an audit of the referendum that failed to oust Mr. Chavez.

“People are still concerned over where that’s heading,” said energy analyst Daniel Hynes at ANZ Bank in Melbourne, Australia.

Mr. Hynes add that oil markets right now are being “driven by fear.”

In order for prices to decline significantly, “we need to see Iraqi supplies coming back and the Yukos problems to go away,” Mr. Bentz said.

With little spare output capacity around the globe, analysts worry that oil producers would have a difficult time making up for shortfalls at a time of robust demand.

Saudi Arabia said last week it could immediately pump an additional 1.3 million barrels per day, but the comments didn’t soothe markets. Experts said the well-intentioned pledge only highlighted the country’s limitations.

On London’s International Petroleum Exchange, Brent crude futures for October delivery traded at $43.03 per barrel, up 4 cents from Tuesday’s floor trade close.

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