Lloyds List: Spiralling oil prices pumped up by marketplace 'fear factor': Nigerian unrest, Iraqi insurgency, Russian export problems and the effects of adverse weather conditions could lead to winter oil shortages, writes Martyn Wingrove (ShellNews.net)

Sep 30, 2004

AS OIL prices shoot over the psychological barrier of $50 a barrel, many experts are wondering how the price of one of the worlds' most important commodities became so high.

Even the Organisation of Petroleum Exporting Countries, which pumps more than a third of the world's oil and controls half of all oil exports, cannot understand how the price ended up at this level.

Oil prices peaked above the $50 barrier earlier this week on the back of further fears of supply problems from Nigerian oil fields as local rebels warned of attacks to production facilities and oil companies evacuated staff.

US light crude oil prices touched $50.47 a barrel before the market opened on Tuesday, but settled down to $49.70 at the start of trading yesterday.

London-traded Brent climbed to new highs of $46.80 a barrel on the International Petroleum Exchange this week.

Traders are waiting to see how the movement of Nigerian troops and tribal rebels will impact oil production in the Niger Delta, while oil majors Shell and Eni have evacuated staff from fields and flow stations.

The threat of tribal warfare in the world's fifth largest oil producer comes at a time when Opec is pumping at maximum levels and when US crude stocks have been decimated by successive hurricanes.

But it is amazing how news of problems in Nigeria, which has long-term rebellion troubles, can influence traders so much. This shows the market is being pumped up by fear and this is a view shared by Opec president Purnomo Yusgiantoro.

'Concerns about potential supply disruptions in other major oil producing countries has contributed to the spiralling price,' he said.

'This tension has caused considerable speculation in oil futures trading with the high level of uncertainty instilling what has been referred to as a fear factor into the marketplace.'

There are other factors instilling this fear, including the threat to some of Russia's exports if Yukos has to cut production or sell assets. It has already indicated it is reducing exports to Chinese markets.

There is always the rebel threat to Iraq's increasing oil supplies to add an edge to the market. The war-torn country is exporting around 2m bpd after restarting pipeline supplies to the Turkish port of Ceyhan, but traders are questioning how long this can last before saboteurs damage more pipelines.

In the US, Gulf of Mexico production remains down by almost a third because of infrastructure damage from Hurricane Ivan. Oil companies continue to send out repair teams to fix damaged platforms and pipelines

In response to increasing oil prices, Opec has been desperately trying to calm down the market and perhaps prevent damage to global economies, but traders are not listening.

'Opec has been addressing the problem associated with supply and demand and we will continue to do so,' said Mr Yusgiantoro.

'At the same time, we recognise that the current situation is not caused by market fundamentals.'

Saudi Arabia, the world's top producer, announced, this week, it would raise its output capacity to 11m barrels per day and actual production to 9.5m bpd.

But Opec's spare capacity will remain historically low at least until the middle of next year as new infrastructure takes time to install.

At the same time, this year's added production in Saudi Arabia is in heavy crude, which is unattractive to refiners. So the factors affecting oil prices are more a case of low supply levels of light crude, which Nigeria is especially good at producing.

With lower domestic production and no evidence of higher world oil exports, it is little wonder that strong oil demand has devoured US stocks over the last two months.

This is a time when refiners should be building inventories before the onset of winter. And this is what traders in the US are fearing a shortage in the high demand winter months.

It will be an interesting time if refiners are caught short this winter when oil prices will be certain to move back above the $50 a barrel level.