Factors behind oil hike

LONDON: Worries about supply disruption in major OPEC producers are the most striking reasons for high oil prices of nearly $70 a barrel.

Beyond the headlines, the energy complex has been propelled higher by an array of factors. US crude has risen by around 13 percent since the start of the year.

Nigeria, Iran, Iraq

Buying gathered momentum after rebel attacks in Nigeria forced the closure of around 500,000 barrels per day (bpd) of high quality oil, favoured by refiners for making gasoline.

Oil consumers also fear supply disruption from Iran, which like Nigeria is an OPEC producer.

Iran, the world's fourth biggest exporter, is locked in a dispute with the West over its nuclear ambitions.

Iraq is struggling to get its oil industry back on its feet. Its exports have stagnated at around 1.3 million bpd, compared with around 1.7 million bpd under Saddam Hussein.

Fears about supply disruption are so marked because OPEC's spare capacity has been squeezed to around two million bpd.

Products drive

Adding to concerns about tight supplies of unrefined crude is a global shortage of refining capacity, exacerbated by new fuel regulations in the United States. Traders worry that refineries will not be able to produce enough gasoline of the right quality for this year's peak US summer driving season, beginning in May.

Most U.S. refiners will stop using methyl tertiary butyl ether, or MTBE, which has been found to pollute water supplies, and switch to ethanol instead. Refining capacity is already tight after years of underinvestment and after the U.S. industry took a battering in last year's hurricane season.

Meteorologists are warning there could be another heavy hurricane season this summer.

Funds

Strong commodity markets have attracted institutional and retail investors, who tend to buy for the long term.

The most straightforward way for these investors to access raw materials, ranging from base metals to oil, is through commodity indexes, led by Goldman Sachs Commodity Index and the Dow Jones-AIG Commodity Index. These major indexes have grown to more than $80 billion, though the precise impact on oil markets is hard to judge. "At least a couple of bucks of the current price is investment in futures contracts," said Deborah White of SG CIB.

While previous price spikes have been triggered by supply fears, the current four-year rally has been so sustained because it has been driven by demand, notably from China.

Demand growth has slowed but is still rising and price strength has so far had a very limited effect on economies.

At talks in Vienna at the weekend, finance ministers from Asia and Europe predicted global economic output expansion of 4.5 per cent, compared with 4.3 per cent in 2005.

Analysts say the world is coping well with high nominal prices, because in real terms, adjusted for exchange rates and inflation, they are lower than during previous price spikes and the world has become less energy intensive.

But they say the $70-a-barrel mark is the level at which even oil market bulls begin to worry about the impact on growth and the possibility that demand will be destroyed.

Reuters Tuesday.