Oil prices may cross $50-mark

LONDON - World oil prices could sally past 50 dollars a barrel and hold at high levels for the foreseeable future on a combination of tight, unstable supplies and rising demand, notably from Asia, traders and analysts said.

By (AFP)

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Published: Mon 23 Aug 2004, 9:52 AM

Last updated: Thu 2 Apr 2015, 11:46 AM

Iraqi output levels remain chronically volatile in the face of concerted attacks on installations by insurgents, which have spooked the market into raising the so-called "security premium' on a barrel of crude up to an estimated 15 dollars.

Therefore, experts consider it crucial that, for any significant downward price correction to occur, Iraq will need to raise exports significantly and sustainably while global demand will have to fall.

Further complicating the picture are other problems on the supply side, notably concerns about Russian oil production prompted by uncertainty over the future of Yukos, and possible political upheavals in Venezuela following a recall referendum for President Hugo Chavez. "It will take a miracle for oil prices to come down," said Investec analyst Bruce Evers. "There is talk of oil prices at 50 dollars a barrel, but this is just a round number. Technically it could go higher still... Prices are set to remain at high levels into next year.

"If there is a big supply problem and Iraqi and Venezuelan oil came off the market, oil at 70 dollars is entirely conceivable," he added.

And the fragile supply situation is exacerbated by unprecedented levels of demand, notably in the Asia where boom economies -- notably China and India -- are moving fast to catch up with western living standards.

Prudential Bache trader Christopher Bellew believes that, for prices to come down significantly, "Iraq would need to resume exports of near two million barrels".

Iraqi oil exports were halved from 1.7 million barrels per day since August 9, when followers of rebel cleric Moqtada Sadr threatened to blow up the country's main southern export pipelines in retaliation for actions by US and Iraqi troops in the holy city of Najaf. Iraqi exports are now thought to be back to about one million bpd.

"But current trading is based on sentiment," Bellow said. To illustrate his point, he said a fire Friday in the northern oil complex of Kirkuk sent prices soaring even though the terminal was already out of action.

Barclays Capital analyst Kevin Norrish said that if tension on the market were to ease other factors were needed such as signs that the global economy is slowing down, a oil demand cools, or possibly even "a large disruption in global supplies" that would prompt the release of the United States' cast strategic oil reserves.

"And the US treasury secretary has assured us... that we are not there yet," Norrish added.

US Treasury Secretary John Snow said Friday he was unhappy with high oil prices but that the United States had no plan to tap its emergency reserve.

His comments were quickly followed by remarks from a White House spokesman also stressing the reserves would not be used to ease prices.

In the meantime, there is little that the Organisation of Petroleum Exporting Countries can do to better ensure that supply matches demand, other than to try to micro-manage output to calm oil prices.

Current Opec production is nearing an all-time high of 30 million bpd, and "there are concerns about whether (key Opec producer) Saudi Arabia can sustain its current high output," said Informa Global Markets analyst Peter Luxton.

And the longer the current imbalance persists, the more damaging its effect on global growth.

"The effects of higher oil prices are already feeding through to Japanese and US GDP (gross domestic product) data," Luxton said, adding: "World economies are already living with higher oil prices, but how long can this be sustained?"

By next year there would be a marked effect on global economic growth. Although it was not clear at this stage if it would spark a recession, he predicted there would certainly be a slowdown.

However, Morgan Stanley economist Stephen Roach, a renowned bear, was not even that optimistic.

He wrote in a research note last week: "All in all, it now appears that the world is being subjected to its fourth oil shock in 30 years."

"Just as the previous three oil price disturbances led to recession, there is good reason to fear a similar outcome in 2005,” he added.

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