Oil prices remained within striking distance of US$70 a barrel yesterday on worries that Hurricane Katrina may have heavily damaged US production facilities, but warnings of a price bubble emerged.
Acting OPEC Secretary-General Adnan Shihab-Eldin was the latest to voice worries over the way crude prices have dramatically shot up, saying these do not reflect market fundamentals.
At 3:40pm New York's main contract, light sweet crude for delivery in October, was at US$67.96 a barrel, up US$0.76 from its close of US$67.20 in the US on Monday.
"We are concerned that prices continue to go up beyond what fundamentals call for," Shihab-Eldin of OPEC said at a conference in Oslo.
"Fundamentals do not justify the current price levels," he said.
The contract had struck an all-time high of US$70.80 on Monday as the market braced for Katrina's landfall on the Louisiana coast.
Oil prices are now more than double the levels that were reached in 2003.
US business publisher Steve Forbes warned yesterday the oil price "bubble" was set to burst with an impact that could make the high-tech bust of 2000 "look like a picnic."
"It's a huge bubble, I don't know what's going to pop it but eventually it will pop -- you cannot go against supply and demand, you cannot go against the fundamentals forever," he told reporters in Sydney.
Katrina slammed into the Louisiana coast on Monday, hitting on-shore refineries around the deserted city of New Orleans and killing at least 54 people in the state of Mississippi.
In the Gulf of Mexico, which accounts for a quarter of total US oil output, an estimated 92 percent of crude and 83 percent of natural gas production was shut down by Katrina, according to government data.
But prices reversed course after the US Department of Energy said that it stood ready to act if requested by oil firms to tackle shortages caused by Katrina's impact on Gulf of Mexico rigs and Louisiana refineries.
The market was also calmed somewhat by Saudi Arabia's pledge to raise its production to make up for supply losses caused by Katrina, but dealers said prices are unlikely to recede much until the extent of damage is established.
"It's the most sensitive area for US crude supply so the market is certainly going to be on watch to see the implications," said Mark Pervan, a commodities analyst with Daiwa Securities in Melbourne, Australia.
"I don't think there will be much selling until the damage report is out ... it's still very jittery," he said.
Saudi Arabia's oil minister Ali al-Nuaimi was quoted as saying by the official news agency SPA on Monday that the country, the world's biggest crude producer, was prepared to help make up for the losses caused by Katrina.
"Saudi Arabia is ready to increase its production to compensate for any lowering in supplies of crude on the international oil market," Nuaimi said.
Analysts are not ruling out the possibility of prices breaching US$70 a barrel again if the damage inflicted by Katrina is seen as being extensive.
"If it turns out that there is significant damage done, particularly to refineries, then there might be a strong reaction from the markets," said Victor Shum, an analyst with energy consultancy Purvin and Gertz in Singapore.
"A lot will depend on the assessment of the damage," he said.
AIR Worldwide Corp, which evaluates catastrophe risks for companies, said Katrina could cost the insurance industry between US$12 billion and US$26 billion.