Output fears send oil prices soaring
Oil prices reached a new record high today on fears of a sharp slowdown in output from Russia and Iraq.
The cost of crude surged to $43.17 a barrel in New York as investors fretted over a stand-off between Russian authorities and its largest oil company, Yukos.
This dispute could shave 2% off the global oil supply if Russia’s Justice Ministry carried out a threat to freeze production at Yukos.
Russian officials yesterday backtracked on a threat to send bailiffs into Yukos as part of moves to reclaim $3.4bn (€2.8bn) in taxes.
But traders remain worried at a time when oil cartel Opec is pumping crude at full stretch.
Concerns have also grown over the ability of Iraqi security chiefs to protect oil installations after 68 people were killed in a car bomb explosion two days ago.
Barclays Capital analyst Kevin Norrish said prices were likely to rise further ahead of winter and a peak of $50 a barrel could not be ruled out.
“The stage is set for prices to continue to move higher. It’s difficult to see what can stop that other than a sharp fall in demand,” he said.
Sentiment in the market has changed since the start of the year when traders believed the rise in oil prices was driven by speculation about supply shortages.
Now analysts point to a growing realisation that demand for oil has been accelerating at a time of inadequate production capacity.
In particular, demand for oil in China rose by around 30% in the first six months of 2004 as its economic growth continued at breakneck speed.
Saudi Arabia – the only producer that still has significant spare capacity - recently boosted its production by about one million barrels, but much of this fresh oil has yet to reach customers and replenish their depleted inventories.
Mr Norrish said these factors magnified the impact of any market disruptions such as terrorist atrocities in the Middle East or the dispute in Russia.
Yukos says it cannot repay the massive tax bill because of a lack of cash, while court orders have frozen assets that it could tap to raise money.
Company officials have repeatedly warned that the group is being driven toward bankruptcy.
Yukos exports about 55 million barrels of oil a year to China via rail. The company’s other exports go primarily to Hungary, Poland, Slovakia and the ex-Soviet Baltic countries.
Phil Flynn, an analyst at Alaron Trading Corp in the United States, said: “The market is finally catching up with reality of (the) Yukos situation.”
Resurgent oil prices left little mark on the FTSE 100 Index, which rose 5.1 points to 4423.8 today.
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