Oil prices at a two-year high

www.heraldsun.news.com.au By Nigel Wilson 10feb03

OIL prices raced to a new two-year high of more than $US35 a barrel at the weekend, raising concerns about their effect on global economic growth. Analysts expect crude oil prices to continue rising because of the increasing US bellicosity against Iraq and demand for heating fuel caused by the severe northern hemisphere winter. Crude oil rose 4.8 per cent in New York last week, closing at $US35.05 a barrel in New York – its highest price since November 2000. In London, March Brent crude oil futures contract rose US90c, or 2.9 per cent, to $US32.34 a barrel. Brent is the benchmark for most of the world's traded oil.

The price spiral in the past two months has prices outside OPEC's target range of $US22 to $US28. It puts the organisation under more pressure to lift production just 10 days after a 1.5 million barrels increase aimed at easing supply problems.

President George W. Bush's remarks on how the UN Security Council should deal with Iraq's Saddam Hussein were influencing the market, but analysts said the Venezuelan strike and the weather were also having an effect.

US oil inventories have fallen to their lowest levels in about 27 years because of a general strike that crippled exports from Venezuela, a key supplier to the US market.

But the real spark behind the market's latest moves is heating oil, supplies of which have suffered their biggest weekly fall in nine years.

It comes as storms blanket swaths of the eastern US in snow. The US is considering releasing two million barrels of heating oil held for emergencies.

The new head of the International Energy Agency, Claude Mandel, said on Friday the risk of an oil crisis resulting from a war with Iraq could be managed. Iraq's oil reserves of 120 billion to 200 billion barrels of oil are second in size only to Saudi Arabia's.

Economists at Goldman Sachs warned that a prolonged oil price rise could hurt the world economy severely. A $US10 rise in the price of a barrel of oil can cost US consumers $US50 billion a year.

If prices stay high for 12 months, global economic growth targets could be cut by more than 1.2 percentage points, Goldman Sachs said.

In a shock decision, BP said yesterday it was delaying development of the $US2.2 billion Tangguh liquefied natural gas project in Indonesia because of poor profit forecasts.

Tangguh won a contract with China after the project lost out last year to the North West Shelf to supply $25 billion worth of LNG to Guangdong.