China (Platts) -- October 15-19 2007

By reporters at Platts, the energy information division of the McGraw-Hill Companies. For more information about Platts' information products in China, contact Platts at china@platts.com, or call its representative office in Guangzhou at (+86) 20 2881 6588.

The middle of October brought record-breaking prices in oil markets around the world, but consumers, government or traders hoping to see a break could well be in for more disappointment, analysts and think tanks agreed.

Talk of triple-digit oil prices has never been so loud. In some markets, like Singapore's jet fuel market, refined oil prices are already at or above $100 per barrel.

"The issue seems no longer to be whether (crude) oil will reach $100 per barrel, but when," Paul Horsnell, analyst at Barclays Capital, said in a report.

"Up to now we had been believers in long-term prices in the low to mid $90s, but every time we take another look at the medium-term numbers, we find ourselves tending just a little more towards wanting to employ that extra digit. As to the shorter run, we think that the latest seismic shift up has a chance of sticking."

Seething political tensions in the Middle East and Pakistan are keeping the oil world on edge, and playing a part in driving prices to record highs. By the end of last week, November crude oil futures on the New York Mercantile Exchange had peaked above $90 per barrel, and settled the week at $88.60, a gain of almost 6% from the week before. Brent crude futures on ICE Futures in London closed the week up 4% at $83.79.

US President George W. Bush, who during a press briefing last week said a move by Turkey to invade northern Iraq was not in its "interests," added to geopolitical tension when he told reporters Iran must be barred from obtaining nuclear weapons to avoid the prospect of "World War III."

Availability of oil through winter a critical issue

While politics carries on, the critical issue for oil itself appears to be supply for the next four months. With the winter season hardly even underway in the northern hemisphere, global oil stocks are already surprisingly tight. Headlines crude futures soared above $90 per barrel last week, and it seemed that OPEC's decision to artificially suppress production for most of 2007 had far overshot its original goal of defending a $60 price level.

Secretary General Abdalla el-Badri even issued a statement on October 16 saying OPEC had "observed with concern the recent escalation in oil prices," but that it strongly believed fundamentals were not supporting these elevated levels.

Ultimately Badri defended OPEC's controversial choice to withhold oil this year, saying that there had been no interruption in crude supplies, that OECD commercial inventory levels remained above five-year averages and that forward cover, at 53.5 days, was at a comfortable level.

But analysts disagreed that all was well with supply and demand, especially in the critical US market -- where still one in four barrels of oil are consumed.

"Over the past three weeks US crude oil inventories have fallen by 4.5 (million barrels) relative to the five-year average whereas the stock position has also deteriorated considerably in Europe," Barclays analyst Kevin Norrish said in a report.

"With the market currently running a hefty deficit -- and with the size of that deficit likely to increase moving into Q4 -- we see the recent move up in prices as fundamentally justified and we think that, for the moment at least, the door for higher highs remain open."

The weakening US dollar, which slid to historically low levels against almost all of the world's currencies last week, was widely seen to be supporting the move higher, since it keeps oil relatively affordable in Europe and Asia.

"Funds still like this [crude] market as long as the dollar supports that position," energy consultant Jim Ritterbusch said on October 18 in a report. "That combined with low stocks at Cushing, Oklahoma."

Crude stocks at Cushing, Oklahoma--home of the NYMEX delivery point--dropped 200,000 barrels to 18.4 million barrels last week, according to data released October 17 by the Energy Information Administration.

In addition, stocks along the Gulf Coast, which can be moved into Cushing via the Seaway Pipeline, declined 400,000 barrels to 174.3 million barrels.

Updated: October 22, 2007