Wednesday, June 2, 2004

Oil prices rocketed 6 percent to a record $42.38 a barrel yesterday in response to a weekend terrorist attack on a facility housing foreign oil workers in Saudi Arabia in which 22 persons were killed.

The price surge in New York trading came despite an 8.5 percent increase in oil production by Saudi Arabia that began yesterday, and expectations that OPEC will adopt a like-sized increase in production tomorrow to lower sky-high oil and gasoline prices.

The attack at the eastern Saudi oil center of Khobar is the second in a month targeting foreign technicians on whom the kingdom depends to keep its oil lifeline to the rest of the world flowing.

Five Western engineers, including two Britons, were killed by gunmen less than a month ago in the kingdom’s Red Sea port of Yanbu. Because of the heightened terrorist activity, France, Britain and the United States have urged their citizens to leave. But major oil companies have not yet moved to evacuate their personnel.

Analysts say the incident illustrates why oil and gas prices are at record highs, despite ample supplies: The third major terrorist attack in Saudi Arabia in the past year comes on top of numerous attempts to sabotage Iraq’s oil facilities and shows that terrorists are trying to undermine Western economies by forcing up the price of oil.

“It is clear that tactics have changed,” said Investec Securities analyst Bruce Evers. “Terrorists have gone from attacking military targets to civilian targets, clearly trying to disrupt Saudi production, which would be critical not only to the Saudi economy but the global economy.”

Mr. Evers noted that, despite the strain on drivers and businesses, the worst has not happened in Saudi Arabia, the world’s largest oil exporter.

“If they suddenly start to attack oil installations, we are going to be in serious trouble,” he said. “Obviously, the oil installations are very heavily guarded but it does not mean that they won’t try to attack them.”

Saudi Arabia and other Middle Eastern producers in the Organization of Petroleum Exporting Countries yesterday strived to assure worried consumers that their oil facilities are secure and they will make good on pledges to pump more oil.

“I’m not worried about the Saudi facilities,” Kuwaiti energy minister Sheik Ahmad Fahd al-Ahmad al-Sabah said in Beirut, where OPEC will meet tomorrow. “Even with the terrorists that Saudi Arabia has faced for days, none of these terrorists has reached any of the oil facilities.”

Secretary of State Colin L. Powell also expressed “confidence in the ability of the Saudi Arabians to continue to provide a secure flow of oil products.”

The Kuwaiti minister said he would support an increase of as much as 2.5 million barrels a day to OPEC’s output quota of 23.5 million barrels. Qatar also is backing a higher target. Kuwait and Qatar are the only nations outside Saudi Arabia with the capacity to significantly increase production.

Despite these assurances, yesterday’s price spike shows that fear of further terrorist strikes and supply disruptions continues to overshadow the oil market. Analysts say the risk of disruptions is adding $10 or more to the price of a barrel of oil.

“The majority of the marketplace thinks that there’s major concern over the security of Saudi supplies,” said Mike Harvey, an analyst with ABN Amro Inc.

“The country’s oil industry depends on highly skilled technical workers, and there’s a fear that they will now flee,” said Michael Fitzpatrick, a broker with Fimat USA Inc.

Analysts said the attacks may slow the new shipments of oil from Saudi Arabia, which even under the best of circumstances take 90 days to reach U.S. markets.

Some analysts said it was a good sign that, despite repeated attempts, the terrorists have failed to disrupt shipments. Meanwhile, their efforts may have boomeranged by prompting OPEC’s 11 members to support a production increase.

“I think this terror attack almost assures that OPEC will raise production,” said Phil Flynn, an analyst at Alaron Trading Corp. “It could unify OPEC against the terrorists.”

This article is based in part on wire service reports.

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