Oil price rise 'only partly due to Iraq war fears'

news.ft.com By Kevin Morrison in London Published: March 3 2003 4:00 | Last Updated: March 3 2003 4:00

Last week's spike in US oil prices to post-Gulf war peaks of almost $40 a barrel could be repeated, analysts say - but it was only partly attributable to the build-up to a potential war in Iraq.

The strains in the US oil market are underlined by a 75 per cent rise in prices over the past 12 months. Paul Horsnell, oil economist at JP Morgan, said the combination of tensions over Iraq, and domestic oil market conditions, has created a potent mix that will result in further price spikes.

"It's not only speculation that is driving the oil price. You have unseasonally high demand for heating oil, a severe winter in the north-east, the disruption in oil supplies from Venezuela and a shortage of gas that is causing some users to switch to oil at a time when inventories are at 27-year low," Mr Horsnell said.

Evidence for the view that the spike is at least partly driven by domestic issues comes from the divergence between movement in the key European oil benchmark price - IPE Brent futures for April delivery - and its counterpart in the US, the Nymex WTI for April delivery.

The Brent price lagged about $6 behind its peer when Nymex crude peaked at $39.99 last Thursday, or four times the average price difference during the past 12 months.

The cold winter means a drop of more than 30 per cent in stocks of heating oil compared with a year ago. With more bad weather forecast this week, US heating oil futures hit a record high of $1.22 a gallon on Friday - double the price it was a year ago.

The supply disruptions from Venezuela and the severe winter have contributed to commercial US crude stockpiles falling below 270m barrels, 50m barrels down on a year ago and viewed as the minimum level required to keep the distribution system working smoothly.

Pressure on the market has been further intensified by gas shortages that could push some power stations and industrial users to switch to oil.

US gas futures prices have risen to more than $8 per million British thermal units, or more than four times the average gas price during most of the 1990s.

"The last time there was a shortage of this magnitude, which was in 2001, it saw demand switch to oil. This added another 600-700,000 barrels a day to oil consumption," said Mr Horsnell.

"This may not be big in relation to the size of the market, but when supplies are tight and stocks are down, this puts further strain on the system," he said.

Mr Horsnell said the shortage in natural gas was due to falling production in both the US and Canada, and the time lag before new pilelines from the Alaskan gas fields come on stream, not expected for another two to three years.

Jay Saunders, an oil strategist with Deutsche Bank in New York, said there were further worries about the low inventories because once the winter is over, the US driving season starts, a period when Americans spend more time driving their cars and guzzle more gasoline.