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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