Jad Mouawad, New York TimesWednesday, September 29, 2004 Paris...

Jad Mouawad, New York Times
Wednesday, September 29, 2004


Paris -- The price of oil, which has been rising for the past two years, broke through the $50-per-barrel mark Tuesday, reaching a milestone as some analysts warned that there was nothing to stop prices from rising further.

Crude oil for November delivery closed on the New York Mercantile Exchange at $49.90 per barrel, up just 26 cents from Monday, a record high for a closing price when adjusted for inflation. Earlier in the session, futures rose as high as $50.47, setting a record. Oil prices, up nearly 55 percent this year, have doubled in two years.

Fueling these gains is an exceptional alignment of events: record high demand, historically low spare capacity and a set of potentially destabilizing events in some of the world's top oil regions, including Iraq, Russia, Venezuela and Nigeria.

"The market is looking for a new equilibrium point, and no one knows where that will be," said Jamal Qureshi, an analyst at PFC Energy, an oil consultant based in Washington. "We still have a way to go. I wouldn't be surprised to see $60 a barrel."

What pushed prices up this week was news of possible clashes between the army and rebel militants in Nigeria that could threaten the country's oil production, and the consequences of Hurricane Ivan last week in the Gulf of Mexico, a region that accounts for a fourth of American domestic oil production.

At the same time, demand for oil is running at a pace not seen since 1978. The world is expected to consume nearly 1 billion more barrels of oil this year than it did last year, driven by strong demand from China, India and the United States.

Saudi Arabia, the world's top oil producer, responded Tuesday with a pledge that it will raise production to 11 million barrels per day, from 9.5 million.

Ali al-Naimi, the Saudi Arabian oil minister, had mentioned the increase in capacity earlier this month while meeting with fellow OPEC oil ministers in Vienna. "The kingdom is ready and capable of making up for production shortfall occurring anywhere in the world," al-Naimi was quoted as saying by the official Saudi Press Agency.

This is the second time oil prices have hit record highs in recent weeks. On Aug. 20, crude oil futures touched $49.40 during trading but within days fell back to about $43 per barrel. Eric Bolling, an independent oil trader on the NYMEX, said this rise might be different. He referred to the oil market as going through a perfect storm.

After the passage of Hurricane Ivan over Florida, the cumulative loss of production from the gulf region had reached 11.8 million barrels, or about 1.9 percent of the yearly output there, said the Minerals Management Service, an Interior Department agency. A third of the region's production is still not making it to markets.

To make up for the shortage, oil companies in the United States have been drawing on their stocks, which are near 29-year lows. In turn, that leaves less oil to refine into either gasoline or heating oil necessary for the seasonal winter peak in demand. Bolling said: "There's underlying strength to $50 this time. A lot of things have happened since $40.''

"I'm going to wait till the market gives me a signal we've reached a ceiling" before betting oil contracts will fall, he said. "We're not there yet. "

Because most oil producers are pumping at full capacity to meet record high demand, little is left in the system. High prices reflect the lack of any substitutes for any interruptions in production anywhere, analysts said.

The Organization of Petroleum Exporting Countries' spare capacity, idle production that can be brought on when needed, has sunk from about 15 million barrels per day in the mid-1980s, to around 1 million to 1.5 million barrels today.

"The market is much tighter today than it's been since 1973," said Daniel Yergin, chairman of Cambridge Energy Research Associates. "Unlike 1973, 1979 or 1990, the market today is going through a demand shock, not a political shock. Also, the market is not thinking long term. It's thinking day to day."

Last month, oil traders were concerned that the fighting in Iraq would spill over and hurt that country's oil exports. Earlier this year, it was the continuing tussle between the Russian government and Yukos, Russia's top oil producer, that kept oil markets on edge.

Earlier still, bombings in Saudi Arabia reminded traders that the kingdom, which holds a quarter of the world's oil reserves, is still a terrorist target.

"What's unnerving the markets is that significant disruptions could come from a number of sources," said Steve Turner, an oil analyst at Commerzbank. "It's possible that prices could go substantially higher given the right set of circumstances."