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Supply woes drive oil markets into renewed frenzy

"[The oil market's recent surge] could correct in the most speculative fashion -- it could collapse."

Andy Xie, greater-China economist for Morgan Stanley in Hong Kong

A hint of a terrorist threat in Nigeria, a major supplier of crude oil to the US, worries about a lack of refining capacity and a growing acknowledgment that OPEC's influence may be waning drove energy markets into another frenzy on Friday, pushing oil prices above US$58 a barrel.

Crude oil for July delivery climbed US$1.89, or more than 3 percent, to US$58.47 a barrel. Some traders said oil might even reach US$70 a barrel, driven primarily by demand in China and the US, before markets start to calm again.

Fears over what might affect the supply of oil, rather than what is actually affecting it, appeared to inject anxiety into the market.

"In this environment, we cannot afford to have any disruptions. We are still in the uptrend," said Thomas Bentz, senior energy analyst at BNP Paribas Commodity Futures in New York.

The closing on Friday of the consulates of the US, UK and Germany in Lagos, Nigeria's largest city, because of reports of threats from Islamic militants put traders on edge.

Nigeria, a member of the Organization of the Petroleum Exporting Countries (OPEC), supplied the US with more than 1.1 million barrels of oil a day in April.

Nigeria's main oil fields are not clustered around Lagos but lie elsewhere in the country, which is the largest oil producer in sub-Saharan Africa. Still, the possibility of a terrorist attack in Nigeria was enough to tap the oil market's fear that demand-driven pressure on prices might evolve into a full-blown supply-driven crisis.

A sudden restriction of oil supplies led to the oil shocks of the 1970s, and the lack of spare production capacity around the world, particularly of the types of crude oil easy to refine into gasoline, has made energy markets vulnerable to whispers of any potential disruption.

So do the opinions that oil is still relatively cheap. Adjusted for inflation, oil is less expensive than it was in 1981, when Iran choked off oil exports.

The average cost of oil used by American refineries at that time was US$35.24 a barrel, or US$75.44 in current dollars, according to figures from Bloomberg.

One of OPEC's concerns, which its members expressed at a meeting this week in Vienna, Austria, is that oil prices will quickly climb to a level where many automobile owners decide to switch from sport utility vehicles to compact cars, or possibly, to public transportation or carpooling.

Such a change in driving habits, while still considered unlikely, might produce a scary outcome for oil-producing countries: a crash in oil prices.

"When I go to neighborhood parties, people are always asking me when gasoline prices are coming down," said David Pursell, a principal with Pickering Energy Partners, an energy investment firm in Houston.

"Well, I always reply, `When are you going to start riding the bus?' There's lots of angst, but not enough to keep us from US$60 oil," he said.

Not everyone is convinced oil prices will continue to soar. "Scary Oil," for instance, was the title of a report written this week by Andy Xie, the greater-China economist for Morgan Stanley in Hong Kong. Xie predicted a sharp decline in oil prices, citing signs of softer demand in China, the second-largest petroleum consumer after the US; Chinese oil imports fell 1.2 percent in the first five months of this year.

"What is occurring now is probably the final frenzy, in my view," said Xie, who went on to write that the oil market's recent surge "could correct in the most speculative fashion -- it could collapse."
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