Oil prices have once again become bullish after what appeared to be a long-awaited respite for consumers everywhere.
However, rather than the sudden spike being attributable to either security, economic or political factors, the last week has seen all three jump into the fray and put more than $2 on a barrel in a single days trading, pushing the August futures back over the $138 mark.
After the biggest fall in three months political hectoring from across the Gulf began to impact global trading. In the last seven days the Iranian regime has threatened to close the Strait of Hormuz to international shipping (in response to growing pressure from the world community to halt its uranium enrichment programme), and followed the warning yesterday with a series of medium range missile tests.
The Iranian missile exercises raised concerns of attacks on US assets in the Gulf and the market responded very much as expected. “While we’re still in a phase of verbal attacks, the danger of military strikes is real and Iran might halt its oil exports,” Gerrit Zambo, a trader at BayernLB in Munich told Bloomberg. “This is driving the oil price up and the situation remains tense,” he added.
To fuel building tension around the commodity markets, the dollar continued its slide against major international currencies, dropping against the Euro, Yen and British Pound this week, compounding the political fall-out from Iran.
As if the market needed any further excuse, supply losses in Nigeria have raised new concerns about future supply security there.
The oil market itself also remains tight, attributable to low surplus production capacity, and growing concern that global supply growth may not keep pace with demand growth over the near term. Preliminary estimates from the US Energy Information Administration indicate that higher oil consumption in the second quarter of 2008 and a modest increase in production left Organization for Economic Cooperation and Development (OECD) commercial inventories below the five-year average at the end of June.
Saudi plans to raise production from 9.4 million bbl/d in June to 9.7 million bbl/d in July, a 27-year high for the nation, have not resulted in an easing of prices. OPEC countries including the UAE and Kuwait have stated that they will not increase production unless the cartel decides to act in unison.
Moreover, while the Saudi action has added supplies to the market, remaining available surplus production capacity during the third quarter is at the low level of about 1.2 million bbl/d, all concentrated in Saudi Arabia.
To cap all of the demand worries, world oil consumption continued to grow, despite seven consecutive years of rising prices. Recently published data indicates that world oil consumption during the first half of 2008 rose by roughly 520,000 bbl/d compared with year-earlier levels. Compared to year-ago levels, this increase reflects a 170,000-bbl/d gain in the first quarter, followed by an 870,000-bbl/d increase in the second quarter.
All in all, it seems that the oil producing nations coffers will continue to swell, and a potent mix of geo-political, economic, and security concerns will keep the oil price sky-high for the foreseeable future.
As BP’s CEO Tony Hayward recently commented at the World Petroleum Congress in Madrid – “The problems are above ground, not below it.”
Daniel Canty is the editor of Oil & Gas Middle East.
