Financial Times: Fifty dollar oil: “…the world will have to get used to a future in which new oil no longer comes from stable areas such as Alaska and the North Sea but increasingly from risky and unstable parts of the planet.” ShellNews.net)

Published: September 29 2004

The oil market is behaving a bit like someone who, expecting trouble, jumps at every car that backfires. The Niger Delta People's Volunteer Force could well be bluffing in telling western oil companies to stop pumping oil this week or risk getting caught in its "all-out war" for autonomy. So far this insurgency's only impact on the ground seems to have been to cause Shell to shut in a mere 28,000 of the 2.3m barrels Nigeria produces on average every day.

But because this threat comes on top of much other adverse oil news, it briefly pushed the price in New York to more than $50 a barrel, the highest level (in nominal terms) since trading in oil futures started 20 years ago. Yet it was only a few weeks ago that the oil price went through the $40 barrier, at which point many felt the price would stabilise. So what or who is to blame?

An easy culprit would be the oil traders themselves. But, as far as the New York market is concerned, the net speculative long positions - taken by traders banking on an increase in the oil price - has declined this year, as the oil price has gone up. Against this generally declining trend, there may be a tendency for speculation to increase towards the expiry of the immediate next month's oil futures contract, as may be happening now and did happen in late July.

But even speculators need some hard evidence to back their long positions, and there is plenty around. Deutsche Bank, for instance, estimates that the current oil price is at a $15 premium above where the balance of average supply and demand would ordinarily put it. But it cites several factors to explain this. Part of the premium, perhaps $3-$5, is just the result of the weaker US dollar in the last two years. This has hit Opec oil-producing countries, whose imports are largely in other currencies, and has inclined them to go for a higher dollar oil price.

But there are four other factors that Deutsche Bank estimates add another $2-$3 each on to the "normal" price. First is political worries about at least four big Opec producers: Iraq, Venezuela, Nigeria and Saudi Arabia. Second are the questions that continue to linger over the fate of Yukos, Russia's largest company, which has had to curtail shipments to China. Third is the low level of commercial inventories in oil-consuming countries. Covering 53 days of oil import needs, these stocks could still be read as adequate, if it were not for the fourth factor - worries about Opec's diminishing spare capacity. This is the market's traditional cushion, but at only 1.5m barrels a day it is now painfully thin.

None of these factors is cause for panic. Some may quickly dissipate; the Yukos crisis could be resolved overnight, and a warm winter would boost stocks. Equally, however, the world will have to get used to a future in which new oil no longer comes from stable areas such as Alaska and the North Sea but increasingly from risky and unstable parts of the planet.