Geopolitical and technical factors keep oil prices high

CONCERNS: The risk of supply disruptions in Iran and Nigeria, combined with a boom in demand and a lack of refinery capacity, are taking a toll


Mon, Jan 23, 2006 - Page 12

Oil prices which are near historic highs above US$70 a barrel, more than triple their level of four years ago, are being pushed up by a combination of geopolitical and technical factors.

The main reasons for recent rises, with oil markets reacting to each new development from two fronts, Iran and Nigeria, which are major producers and members of OPEC.

In both cases, traders fear a long-term disruption of supplies, in the event of international sanctions against Iran, which has resumed its nuclear research program, and owing to repeated attacks on Nigerian oil installations.

Any loss of crude would be impossible to completely replace given the current delicate balance between supply and demand.

Added to that is a terrorist factor raised by new threats from Al-Qaeda against the US, and longstanding sources of tension such as Iraq.

No room for error

This has created "accumulated concern" among oil traders on a market that has little room for maneuver and was rocked by the recent gas dispute between Russia and Ukraine, one expert said.

Almost simultaneous rebounds by economies worldwide in the past two years has led to a surge in oil consumption, particularly in China and the US, and is expected to continue this year.

The International Energy Agency (IEA) forecasts global demand will grow by 2.2 percent this year, to 85.1 million barrels per day (bpd). China has recently clarified in part statistics on its economic growth, but its future oil needs remain a major question.

Oil output is finding it hard to meet the surge in demand. Most producer countries are pumping at full capacity and only Saudi Arabia has real spare capacity, estimated at around 1 million bpd.

That crude is heavy, however, and difficult to refine.

The lack of leeway in the event of a problem in a major producing country is a serious source of concern for many market players.

In general however, problems in the past few years have been taken to heart by both producer countries, which are increasing investments little by little, and by consumer countries which have rebuilt strategic stocks.

Refining capacity

Oil analysts and OPEC had already underscored the issue, and the hurricanes last year in the US focused attention back on weaknesses in the refining sector, which has become a serious bottleneck.

No refineries have been built in Europe and the US in the last 30 years and existing facilities often require major repairs.

On top of that, some refineries cannot handle heavy crude, which is all producers can offer on top of their usual output.

A lack of refined products such as gasoline and heating or diesel fuels has contributed to increased crude oil prices.