A Perfect Oil Storm on the horizon

In the 2005 television docudrama “Oil Storm,” a hurricane that destroys a vital US pipeline, a tanker collision which closes a busy port, terrorist attacks and tension with Saudi Arabia lead to wild speculation, crude oil prices around USD 150 per barrel and an oil crisis that paralyses America.

It’s just fiction, but not far from the truth!

Excessive oil market speculation, uncertainty about future supplies, increasing nationalism by major oil-producing countries, hurricanes and storms, refining capacity problems in the US and around the world, and growing demand, allowed oil to close above USD 80 per barrel for the first time on September 13, 2007.

“It’s convergence of almost a perfect storm where everything that could possibly push oil prices higher has taken place,” Fadel Gheit, a senior energy analyst at Oppenheimer in New York, told New Europe on September 14.

In London, Dr. Fadhil Chalabi, executive director of the Centre for Global Energy Studies, said the main reason for the price hike is that there hasn’t been enough oil in the market to meet world demand. “The stock build-up has been falling continuously, which means that refiners seek more crude to replenish a depleting stock,” he told New Europe on September 14.

He said Organisation of Petroleum Exporting Countries (OPEC), especially Saudi Arabia, have been cutting back their production and this has caused the high prices.

A day earlier, OPEC oil ministers agreed on a slight increase in output by 500,000 barrels per day, starting from November 1. But the increase is too little, too late to bring down oil prices. “It is not enough. The importance of this increase is that it stabilised the price at the present level. This half million barrels a day, if it is entirely pumped in the oil market, will prevent a further increase in the price, but it will not cause a decline in the price. The price may continue to be in the area of USD 75-76,” Chalabi said.

OPEC on September 13 rejected responsibility for the latest oil price hike. OPEC chief analyst Hasan Qabazard was quoted as saying by the press in Vienna other factors were also influencing the market, ranging from attacks on oil facilities in Mexico, and hurricane Humberto, to the effects of the US mortgage crisis.

The rising oil prices are also compensating for the current weakness in the dollar.

Gheit shares OPEC’s view. The US-based analyst told New Europe the oil market is very highly speculative. “I share the view of OPEC that current oil prices do not reflect the market fundamentals. There is at least a USD 25 premium in oil prices as we’ve seen them,” he said, adding that this premium is not going to disappear any time soon unless something drastic happens in the oil market like, for example, regulators scrutinise how oil is traded around the world. “For every dollar of oil consumed around the world, there is about 10 dollars traded. And this volume has increased almost tenfold in the last five years which leads me to believe it must be a very profitable operation to speculate,” he said.

Global inventories are still high, yet the market is concerned about potential supply disruption. “Assuming the largest producing country in the world -- that’s Saudi Arabia -- stops producing oil, the global market has enough inventory to make up for the short-fall for the next 15 months. If Iran chooses tomorrow to stop producing oil, hypothetically speaking, the world oil inventory will make up for the Iranian production shortfall for the next three years. So, there is no reason, in my view, for people, traders or government officials in any country around the world to really worry too much about security of supply. But in this current market, logic is not in the mix. The market is very highly speculated,” Gheit said.

Justin Urquhart Stewart, of Seven Investment Management in London, agreed there is a lot of speculation in the oil market. He said other reasons for the high oil price include constriction in terms of refining, Humberto, and “the continuing sabre-rattling that is going on with Iran.” The situation with Tehran is making the market nervous. “A lot of people don’t trust the Bush administration at the moment,” he told New Europe on September 14. “There is a very good chance we could see a flight between now and Christmas that could take it up, at least for a short time, up to close to USD 100 (per barrel).”