Thursday, August 5, 2004

Even higher oil prices predicted



By Brad Foss
The Associated Press

WASHINGTON - Oil prices could rise as high as $50 per barrel before the year is up, analysts say, as the world's growing thirst for crude stretches supplies thin and uncertainty abounds in petroleum-producing nations.

"The fundamental fact is that oil is tight," says Leo Drollas, chief economist for the London-based Center for Global Energy Studies. Drollas believes $40 is a more likely price in the next month or two - although if demand is strong and the winter is cold, prices could reach $50.

Prices might leap even higher if there were a major supply disruption.

Even at $50 per barrel, prices would be about 12 percent less expensive than they were leading up to the first Gulf War, and more than 40 percent below the levels reached during the oil crisis of the early 1980s, when inflation is taken into account.

Of course, current high prices could begin to sap demand for gasoline and weaken the broader economy - both of which would cool today's red-hot oil markets.

And while a terrorist attack in the United States would cause a brief run-up in the cost of oil, analysts said that would likely be followed by a longer-term decline in prices because of the negative impact such an event would have on the economy.

On Wednesday, oil futures retreated from record highs set the day before as concerns about Russian supplies abated and government data showed U.S. gasoline supplies rising. That still left oil for September delivery at $42.83 per barrel, or about 35 percent higher than a year ago.

The main reason for soaring prices nowadays is that global demand has risen faster than producers had expected, leaving the market with very little cushion.

PFC Energy, a Washington-based consulting firm, estimates that total global production will average 82.1 million barrels a day in 2004, or just 100,000 barrels a day above consumption.

"OPEC is putting out a lot of oil, but the market is absorbing it," said Jamal Qureshi, an oil market analyst at PFC Energy.

On Tuesday, U.S. light crude for September delivery closed at $44.15 - an all-time high on the New York Mercantile Exchange. Oil prices also hit new heights in London on Tuesday, closing at $40.64 on the International Petroleum Exchange.

Recent geopolitical uncertainty in countries such as Russia and Iraq has made energy traders edgy, raising fears that the supply-demand balance could tilt further.

In Russia, the concern is over the fate of troubled oil giant Yukos, which produces 2 percent of the world's oil but is under pressure from the government to come up with billions of dollars in back taxes. Fears of an immediate drop in output abated Wednesday after Yukos said Russian authorities will allow the company to use its bank accounts to "continue financing production activities."

In Iraq, insurgents are attacking oil infrastructure.

There is also concern about production out of Nigeria due to labor unrest, and out of Venezuela, due to political uncertainty. In less than two weeks, there will be a presidential recall ballot in Venezuela, a major oil exporter to the United States.




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