Oil prices 'waiting for something bad to happen'
Crude futures rose to a new high near $49 a barrel as the threat of sabotage to Iraqi oil infrastructure loomed larger than promises from Baghdad to boost exports in coming days.
Those fears were amplified late yesterday after Shiite militants broke into the headquarters of Iraq’s South Oil Co and set the company’s warehouses and offices on fire, witnesses said.
Underpinning the market’s nervousness is the belief that the Organisation of Petroleum Exporting Countries (Opec) – Saudi Arabia in particular – does not have the ability to swiftly raise production high enough in the event of a major global supply disruption.
“The momentum of fear is running so hot now, everyone is waiting for something bad to happen,” said Ng Weng Hoong, editor at EnergyAsia.com in Singapore.
September crude futures peaked at $48.88 a barrel in after-hours electronic trading today at the New York Mercantile Exchange, setting a fresh record high.
US light crude for September delivery rose $1.43 to close at $48.70 yesterday on the New York Mercantile Exchange – the highest Nymex settlement on record. When adjusted for inflation, oil is roughly $8 less per barrel than it was leading up to the first Gulf War.
That disparity is quickly disappearing, though, and economists are becoming increasingly worried that high energy prices are damaging growth in the United States and around the world.
“We’ve been dropping our economic forecast pretty regularly now as the price of oil goes up,” said Sung Won Sohn, chief economist at Wells Fargo in Minneapolis.
Wells Fargo predicts that US gross domestic product will rise 3.5% on an annualised basis in the second half of the year, down from 4.5% just a couple of months ago. “That represents hundreds of thousands of jobs,” said Sohn.
After regular trading had ended on Nymex, witnesses in Basra said insurgents loyal to radical cleric Muqtada al-Sadr broke into the Iraqi oil company compound and burned its warehouses. The fire then spread to the company’s offices.
Earlier in the day, Iraqi oil minister Thamer al-Ghadhban said the country was prepared to resume pumping its capacity of 1.7 million barrels per day, up from current levels of about 1 million a day. “We will resume full south oil exports shortly,” Ghadhban said at a news conference in Baghdad.
Whether the attack in Basra would alter that plan was not immediately clear.
Moreover, the impact of Ghadhban’s announcement was minimised by heightened tensions in southern Iraq. Al-Sadr rejected a government ultimatum to immediately disarm his militia and pull them out of a Muslim shrine in Najaf without conditions. And as hopes of a quick cease-fire waned, fears of oil-pipeline sabotage rose.
“The market has taken the disruption in Iraqi oil supplies very seriously,” said James Steel, director of commodities and oil research at Refco, a New York-based brokerage.
Iraqi output and exports have been hampered recently by fighting in the southern part of the country, putting upward pressure on global oil prices at a time of strong demand in China and the US and supply concerns in Russia, Venezuela and other petroleum-producing nations.
“The market has been able to accommodate a supply disruption from one source,” Steel said. “But what makes oil prices jittery is when you have the possibility of disruptions from several sources at once.”
There were also technical factors behind Thursday’s rally. Traders said those who had waited on the sidelines in recent weeks, hoping that prices would fall, came into the market as buyers yesterday in order to secure next month’s supply. The September contract expires today.
The price of crude is 59% higher than a year ago and has spiked by almost 31% since the end of June.
On London’s International Petroleum Exchange, Brent crude futures for October delivery soared $1.30 to $44.33 per barrel.
“Fifty dollars isn’t so unreasonable anymore,” said Victor Shum, oil analyst at Texas-based energy consultants Purvin & Gertz in Singapore.
Analysts and traders also remained concerned about developments and a possible cut in supply from Russia and Venezuela, both major crude exporters.
