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Friday, February 28, 2003

US oil price surges to almost $40

news.ft.com By Carola Hoyos, Energy Correspondent Published: February 28 2003 3:11 | Last Updated: February 28 2003 3:11

Crude oil prices on Thursday surged to almost $40 a barrel, a high not seen since just after Iraq invaded Kuwait in 1990. The $2 jump was fuelled by concerns over a lack of US oil supplies ahead of an increasingly inevitable war with Iraq.

The jump affected the US benchmark crude far more than its London counterpart and proved short-lived, however, with the Nymex contract closing at $37.20. One trader described the morning session as one of the "wildest rides" the energy futures market had seen in years.

Commercial stockpiles of US crude oil are smaller than they have been since 1976 and in the past week fell to the minimum 270m barrels needed to keep the US's vast system of refineries, pipelines and storage tanks running smoothly.

Meanwhile, a cold winter gripping the US north-east has cut stored heating oil to dangerously low levels, more than 30 per cent below last year's inventories.

Washington has tried in vain to calm the recent market jitters by announcing that it would consider in the event of a war with Iraq releasing some of the 600m barrels of crude oil it stores for emergencies. The Opec oil cartel has also tried to reassure markets, raising its output quota in January and promising to use its spare output capacity to fill the void of the expected 2m barrels a day in Iraqi exports that will almost certainly be lost if war occurs.

But the world faces supply interruptions not only from the Middle East. George Beranek, analyst at PFC Energy, a consulting company in Washington, said: "Inventories are low enough that the market really is working without a safety net, particularly in the US.

"If you have renewed problems in Venezuela or problems in Nigeria in the run-up to their April presidential elections, then you are going to have a serious problem very quickly."

The effect high oil prices will have on the world economy will largely depend on the length of time they maintain their lofty heights. For many countries, a big mitigating factor has been the recent drop in the value of the dollar, the currency in which oil is traded.

"The real problem comes if these problems last a long time. One month should not be a problem, three months will have an impact in developing economies and six-12 months could be serious," Mr Beranek said.

But alternatively, releasing extra Opec crude and stockpiles held in storage in Europe, Japan and the US could swamp the market. Prices could drop to well below $20 a barrel if a short war in Iraq causes little damage to the country's oil fields and the worries about oil supply interruptions in countries such as Venezuela prove unfounded.

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