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Analysts say new crude oil highs emotion-driven

A worker turns a valve at an oilfield in Basra on Wednesday. Exports from Iraq's southern oil terminals has been cut by half to around 40,000 barrels per hour for a week because of threats to infrastructure from Shiite militia, an oil official said on Tuesday. PHOTO: AFP

Fear, not fact, is powering world oil prices to all-time highs, defying even positive news such as a peace deal in the Iraqi flashpoint city of Najaf, analysts said.

Prices set new records here Wednesday despite a report that Muslim Shiite militia leader Moqtada al-Sadr had agreed with a national Iraqi conference to disarm his militia and leave a holy shrine following a ceasefire.

"Sayyed [honorific] Moqtada al-Sadr has sent a message to the national conference in which he accepted all the conditions extended to him, but there must be a ceasefire for the steps to be implemented," said one of his aides, Ahmed al-Shaibani.

The news came hours after Iraq's defense minister had threatened to crush his rebellion.

Even so, New York's benchmark contract, light sweet crude for September delivery, surged US$0.52 to a record settlement of US$47.37. In electronic trade shortly after the market closed, it shot to an all-time high US$47.50.

Brent North Sea crude for October rose US$0.04 to finish at US$43.

"Inventories look like they are in good shape and not nearly as bad as this spring but investors worry that demand has grown more than supply."

Marshall Steeves, a Refco market analyst

Despite the Iraq deal, "exports in the south are still interrupted" and there was no guarantee that fighters would stop targeting the pipelines, said PFC Energy analyst Jamal Qureshi.

Crude exports from Iraq's south-ern oil terminals were halved to about 40,000 barrels an hour because of attack threats from Shiite Muslim militia, a Southern Oil Company official said this week.

The big fear on the market is that oil producers, including the OPEC, are straining to pump at near maximum rates, meaning a disruption could quickly become a shortage.

The latest weekly snapshot of US commercial crude oil inventories in the week to Aug. 13 showed a drop of 1.3 million barrels to 293 million, the US Energy Department said.

It was the third straight weekly decline.

"Even if the inventories are fairly normal, investors focus on the drought headline," Qureshi said.

Refco market analyst Marshall Steeves agreed.

"Inventories look like they are in good shape and not nearly as bad as this spring but investors worry that demand has grown more than supply," Steeves said.

"They are concerned that the market is going to run out of spare capacity," he said.

In this climate, analysts said prices were still heading higher, driven by the market momentum.

A price of US$50 a barrel was in sight, Steeves said, "more because of a fear premium of potential disruption ... than because of existing problems."

World supply faces an extraordinary array of risks: instability in Iraq, a possible bankruptcy at Russian oil titan Yukos, stormy weather in the oil-rich Gulf of Mexico and hot demand, especially in China.

"We think the rise in oil prices is not just a spike but a long term trend with even more potential for higher highs going forward," warned Wachovia economist Jason Schenker.

Fears of a surge to US$80 or US$100 were overdone, however, Steeves said.

"You would have to have Yukos shutting off their production, as well as [a production halt] in Iraq, and a strike in Nigeria," he said.
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