It was a question of when not if for oil traders on Tuesday as the price of a barrel of crude threatened to burst through the $60-a-barrel barrier for the first time.
News that the North Sea Forties oil field had been shut because of technical problems pushed an already jittery market, which has jumped 11% in the past week alone, to a new record high of $59,55 for US light crude.
Although BP, which operates the pipeline to the field, said the problems would soon be fixed, dealers are jumpy about any supply disruption in the face of strong global demand and in spite of promises of further output from the Organisation of the Petroleum Exporting Countries (Opec) cartel.
”The market is so close to $60 it is almost bound to touch it,” said analysts at consultancy Refco on Wednesday. ”Prices look too high fundamentally, but we have to recognise even a minor supply glitch or hint of one will drive them higher.”
The Opec president said he would begin consultations with other ministers from the oil cartel on Friday to release an additional 500 000 barrels a day of Opec crude if prices remain high.
”If prices continue to increase as it is now, by the end of this week … I will start consultation with my colleagues to release the 500 000 barrels per day,” Sheikh Ahmad al-Fahd al-Sabah of Kuwait said.
The promise had little effect on the markets, however, with analysts remaining unconvinced that Opec has the capacity to ratchet up supply.
Instead, dealers are concerned about a lack of refining capacity in the United States — where a new facility has not been built for more than 30 years — the kidnapping of workers in Nigeria and the long-term implications of the jailing of Russian magnate, Mikhail Khodorkovsky, for output from his firm, Yukos.
Analysts are now openly considering the prospect that high oil prices are here to stay. When the upward movement began in early 2003, it was said the rise would be reversed as soon as demand cooled and fresh supply kicked in. Charts show, however, an unmistakable trend, with each peak being higher than the last.
There are some reasons for optimism as far as the impact on the world economy is concerned, however.
The first is that in real terms, adjusted for inflation, the oil price is lower than it was when the Iran-Iraq war began in 1980. The second is that de-industrialisation and the expansion of service sectors have made Western economies less dependent on petrochemicals than during the shocks of the 1970s that led to deep global recessions; the amount of oil used per unit of output has fallen by more than half.
Paradoxically, the final reason why higher oil prices may be less of a factor than in the past is that the lion’s share of the price paid at the pump by motorists is accounted for by tax — in Europe at least. It takes a very hefty increase in the cost of crude to have a real bearing on the price paid by drivers.
That is not to say it will not have an impact at all. Ray Holloway, of Britain’s Petrol Retailers’ Association, said the current problem had as much to do with a shortage of refining capacity in the US as the most recent surge in crude prices.
But either way, petrol was about to set new records at the pumps in Britain and could rise again in July, when the American driving season starts with the July 4 public holiday. The US market is easily the largest in the world and sucks in oil and gasoline from around the globe.
Stuart Thomson, analyst at Charles Stanley, said he was concerned about global oil supplies this year.
”Production in Russia is expected to drop by up to 20% in the aftermath of the Yukos affair. There are growing concerns over the political situation in Nigeria. Opec will undoubtedly increase its quotas, but with most countries producing at full capacity and long lead times to bring on extra capacity in Saudi Arabia, the market is expected to remain tight for a considerable period. Given these supply constraints, $60 a barrel is the most likely price target in the near term.”
Julian Lee, an analyst at the Centre for Global Energy Studies, said the supply problems meant the only thing that would lead to lower oil prices would be a drop in demand, which increased at its strongest pace to date last year, driven by strong economic growth around the world, particularly in the US and China.
”It is demand that is pulling it, and so the effect on the world economy is slower than in the past. Economic growth has been so strong that a slowdown still leaves growth positive.”
Graham Turner, from the consultancy GFC Economics, said there had not been many indications of a slowdown in either China or the US this year. The Chinese, he said, had been particularly astute, tending to build up crude stocks each time the price dipped.
”None of the concerns from last year have really gone away. There are supply constraints and the two biggest economies are growing fast. That means you are going to have a problem with oil prices. The price of crude could go to $65 to $70 a barrel the way things are going.”
Earlier this year, analysts at Goldman Sachs predicted that oil prices could climb above $100 a barrel if supply problems continued to interact with strong demand.
That may happen, but there is an old adage in the oil business: high prices lead eventually to low prices. — Â