October 26, 2007 -
There was considerable alarm in mid-September when New York
crude futures prices climbed above $80/barrel. OPEC secretary
general Abdalla el-Badri, speaking three days after OPEC's
September 11 meeting, which resulted in a decision to increase
actual crude output by 500,000 b/d from November, said OPEC
didn't believe the then-record prices would last because they
were not justified by market fundamentals or any shortage of
crude.
Badri attributed the price spike largely to hurricane-related
supply fears in the Gulf of Mexico, an attack on a gas pipeline
in Mexico and refinery problems in the United States. "We don't
think about a permanent $80," he said at the time.
But prices have continued to climb, soaring above $90/b on
October 19, and trading at a new record of $92.22/b on Friday.
On Thursday, after the US imposed new sanctions on Iran, US
light crude futures settled above $90/b for the first time ever.
Analysts now are not ruling out $100 oil.
As prices raced upwards towards $90, Badri issued a statement
on October 16 expressing OPEC's concern but insisting that the
market was well-supplied and that the surging prices were due
more to speculators in the market than to any fundamental
shortage of oil.
Falling commercial crude inventories in the US ahead of the
peak winter demand season have been a key factor in driving
prices towards the $92/b level, while the continuing weakness of
the US dollar has also added upwards momentum.
The new $92.22/b record for US light crude came the day after
Washington tightened sanctions on Iran to punish the country for
its nuclear ambitions and alleged sponsorship of terrorism.
"Iran-US sanctions...that was the trigger yesterday," a
London-based broker said Friday. "If you look at the sanctions
in detail, though, they won't affect exports of crude. But all
those words in one sentence is bullish."
Another broker said: "We thought $90 would be the lid but it
has now exceeded that and where does it stop? It is above all
resistance levels now. $100? It's anyone's game."
Analysts at Barclays Capital said the "confluence of strong
fundamentals and a worsening geopolitical environment" had
created the platform for the sharp rise in prices.
Evidence that oil balances are tight has been mounting and,
with inventories low, markets are becoming increasingly uneasy
about winter supply.
"As a result of this strong fundamentals backdrop,
geopolitical events are exerting heightened influence on prices.
The escalation of tensions between Turkey and Kurdish
separatists, along with the increasingly confrontational tone
over the Iranian situation--with a new set of sanctions having
been imposed by the US--are certainly aiding factors behind the
strong upwards momentum," they said in a report.
"OPEC's decision to raise production by 500,000 b/d effective
November is also too little, in our view, to soothe current
market tightness," the Barclays Capital report said.
Leo Drollas, deputy executive director at the Centre for
Global Energy Studies, a London think-tank established by former
Saudi Arabian oil minister Ahmed Zaki Yamani, said the world
needed more OPEC oil.
"With the oil price over $90/b, it's obvious the market needs
more oil, and the sooner the better," he said Friday. "Saudi
Arabia has been increasing output since the summer.
Discounts for heavy crudes have been rising, but they will
have to do more. If they don't, there is a danger that prices
will get out of hand and damage the world economy's growth
prospects through inflationary pressures."
The International Monetary Fund warned on October 17 that,
against a background of limited spare oil production capacity,
oil supply shocks or heightened geopolitical concerns could lead
to further price spikes. Options prices, it said, suggested a
one-in-six chance of prices rising above $95/barrel over the
period.
The IMF said the global economy had so far been "able to
absorb the sustained run-up in oil prices over the past five
years without major impact," but noted that despite some
expansion of OPEC production capacity and "massive" investment
by Persian Gulf producers, "the overall supply response to the
recent higher level of prices has been sluggish so far."
US Energy Secretary Samuel Bodman has repeated his call on
OPEC and other producers to boost output to ensure that global
oil demand is met, noting that while US crude stocks were
currently above the five-year average, global stocks, especially
those in the industrialized countries, were below historical
levels.
Bodman said on Wednesday that he had been in contact with
OPEC ministers and was "hopeful they will follow through" with
additional supply.
OPEC heads of state will meet in Saudi Arabia on November
17-18 and a ministerial meeting is scheduled for Abu Dhabi on
December 5, but the group has given no signal that it might
boost output further this year.
Secretary general Badri was quoted saying Wednesday during a
visit to Beijing that the group was not currently discussing
another output increase.
"We have no price band or price target," the Wall Street
Journal quoted Badri as saying. "If it persists for a longer
period, then we start worrying. But at this time we don't know
what's going to happen next month."
