The twists and turns of oil prices New conflict leaves traders predicting more record highs
 
Jul 18, 2006 - International Herald Tribune
Author(s): Carter Dougherty

Oil prices gyrated again Monday, surging and then retreating, over worries about a wider conflict in the Middle East, underscoring energy markets' intense sensitivity at a time of tight supplies.

 

Israel and Lebanon are not oil producers, but the week-old clash already has traders contemplating the prospect of oil at $80 a barrel as the next price barrier to fall. Analysts said the confrontation could drag on for weeks, further destabilizing the region, or widen to involve Syria and even Iran a major producer.

 

"Things can still get a lot worse, in terms of expansion of the bombing campaign and other countries getting involved," said Andrew Harrington, an analyst at Australia & New Zealand Banking Group in Sydney, Bloomberg News reported. "Whenever Israel is involved in a shooting war there is a reaction from the Arab-dominated oil suppliers."

 

Energy analysts were considering chains of events by which the current conflict, limited as it is to Israeli bombardments of Lebanese infrastructure and rocket attacks against Israel, could escalate if Iran or Syria openly supported Hezbollah. That step would likely draw a strong Israeli response.

 

Traders on Monday shrugged off a report by the Organization of Petroleum Exporting Countries that predicted an ebbing of demand in 2007 as economic growth in the United States, Europe and even China slackened as central banks slowly raised interest rates. OPEC said demand would rise by 1.3 million barrels a day next year, about 100,000 barrels less than the rise this year.

 

But even the OPEC report said that macroeconomic developments could not make up for bottlenecks in refining, or downstream, capacity, or the political risks in oil-producing countries.

 

"Whether the market will benefit from the full effect of these trends will depend mainly on downstream developments and nonfundamental factors, particularly geopolitical tensions," OPEC said in its monthly report.

 

Oil prices hit a record high of slightly over $78 per barrel in London before retreating to $75.30 late Monday on news that Israel might halt its bombing campaign in Lebanon within the next few days. But in the ensuing hours, prices rose, despite suggestions by Iran that a prisoner exchange could settle the escalating violence between Israel and Hezbollah guerrillas in southern Lebanon.

 

Rising demand for oil in China, India and other emerging markets has provided the backdrop to volatile oil prices, ensuring that the less predictable factors that drive the market whether open conflict in Lebanon or deadlocked negotiations over Iran's nuclear program set the tone for traders. Factors like oil stocks and production schedules still matter, but energy markets are transfixed by the politics of oil, analysts said.

 

"The market is not preoccupied by the fundamentals of late," Eoin O'Callaghan, an energy specialist with BNP Paribas in London, said. "But the story of fundamentals will not go away."

 

 


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