Oil prices ignore supply and demand

Record high oil prices are being driven by fears of political upheaval in oil-rich nations and not by current supply or demand, experts say.

    Analysts say weeks of calm in Iraq could bring prices down

    According to one oil specialist on Wednesday, the reality is there is no lack of the fossil fuel.

    "We're crazed about the price level, but there's no physical shortage of oil," said Tim Evans, senior analyst at IFR-Pegasus. "This is a market dominated by fears."

    Oil futures on the New York Mercantile Exchange hit a record over $43 a barrel on Wednesday, bringing prices more than $12 above what they were a year ago even though US stockpiles of oil are now substantially higher.

    The surging price of oil has raised concerns that inflated energy costs could hobble US economic recovery. American stocks slipped on Wednesday as oil prices surged.

    Source of concern

    Energy dealers have attributed gains to the possibility of disruptions to oil shipments from key suppliers, such as Saudi Arabia and Iraq, and more recently Russia - where oil giant Yukos is in the midst of a tax evasion dispute.

    "I think the market is overdoing it on Yukos," said Bill O'Grady, market analyst at AG Edwards. "If a country is looking to aggressively appropriate the assets of a company, that doesn't mean they are going to stop production."

    "We need four weeks of relative calm, no strikes, no pipeline attacks, to allow the market [players] to take a look at the situation and ask themselves, 'Is it really that bad?'"

    Tim Evans,
    senior analyst at IFR-Pegasus

    Fears over terrorism and political unrest have long been supporting higher prices for oil, but the fundamental supply and demand situation has been quietly improving - making record energy costs harder and harder to justify.

    US oil supplies rose last week by 1.2 million barrels to 300.5m barrels, bringing them 17.3m barrels higher than last year, according to the US Department of Energy.

    Record imports

    Crude imports, meanwhile, hit an all-time record of 11.3m barrels per day.

    "This market is hysterical," said Bill Ferer, president of WH Reaves & Co. "The uncertainty in the market has overwhelmed the fundamentals, creating a big dislocation."

    An analysis of stockpiles and consumption levels alone would dictate a price for oil at least 25% cheaper than it currently is, analysts said.

    "The reason for the difference is terrorism, terrorism, terrorism," said Evans of IFR-Pegasus. "But the terrorists don't have to do a thing. We've already got oil at $43 and record gasoline prices. We're terrorising ourselves."

    Knocking down the "house of cards" may not be easy, as long as the market holds fast to its fears, Evans said.

    "We need four weeks of relative calm, no strikes, no pipeline attacks, to allow the market to take a look at the situation and ask themselves, 'Is it really that bad?'"

    SOURCE: Reuters


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