Oil and gold prices are skyrocketing as Middle East tensions persist, writes Sherine Nasr Oil and gold have turned into registers of political tension and fear. Hopes for their prices to stabilise are periodically shattered by geopolitical strife, most recently the violence escalating in the Middle East. An Organisation of Petroleum Exporting Countries (OPEC) basket of 11 crudes stood at $67.99 per barrel (pb) on Monday 24 July, compared to $68.44 the previous day. "The price has soared rapidly over a very short period of time," one oil expert explained, speaking on condition of anonymity. "Escalating violence and uncertainty on the international scene make it very difficult to predict oil prices over the next three months." He continued that, in the absence of hope for good news, whether from Nigeria -- the news that two explosions hit oil installations, causing a heavy spillage and a loss of 120,000 bpd, though denied by Eni, the Italian company that owns the field, has rendered Nigeria unreliable -- or indeed Iran, Iraq or the Middle East in general, oil prices are likely to go on rising. Worth noting, in this context, is that speculations on the September delivery at the principal oil bourses -- New York, London, Singapore and Tokyo -- have already exceeded $78.25 pb. "Speculations will continue to upset the market now that anxiety has already prevailed," the same expert announced. As far as Iran is concerned, he added, "It definitely needs resources to finance Hizbullah in its war against Israel." For its part OPEC, noting with concern the upward pressure on oil prices in the last few weeks, has reassured the market of its commitment to order and stability for the benefit of producers and consumers alike. According to the OPEC monthly report for July, "the expected increase in OPEC capacity, combined with a projected decline in required OPEC crude should help to moderate prices in 2007." Having said that, the report goes on to indicate that "whether the market will benefit from the full effect of these trends will depend mainly on downstream developments and non-fundamental factors -- particularly geopolitical tensions, a major factor behind the current record." Assuming that OPEC production continues at 29.6 mbpd -- the average of the first half of this year -- a considerable stock build will have accumulated by 2007, since OPEC production capacity is expected to increase by about one per cent to reach 34.3 mbpd. As a result, spare capacity should stand over 10 per cent compared to 6.6 per cent in 2004 and eight per cent in 2005. Rising oil prices are a mixed blessing for Egypt, whose bill for exporting oil will no doubt increase as a result. Yet Egypt also imports large amounts of crude oil and other oil- related products. According to the aforementioned expert, "I think the recent price highs will reflect negatively on Egypt because the nation's imports of oil products overweigh its exports of crude oil," the daily production of the latter estimated at around 560,000 bpd, almost half of that being exported. The same geopolitical developments have pushed gold prices above $612 an ounce on 24 Monday. Experts believe it will remain steady at this price provided no further negative developments take place in the region. For stock traders, gold provides a safety valve against inflation and market uncertainty. Indeed gold prices have witnessed a sustained increase since the start of 2006, hitting record prices that had not been seen in the past 26 years when, in 1980, an ounce was priced at $850. In the following years, gold price stabilised at $240 an ounce until 2000 when it gradually rose until it reached its highest in May this year; and there is little certainty concerning where the market will go during the rest of the year. According to Ali El-Sergani, the renowned gold dealer, the local market witnessed sharp fluctuations ranging from LE10 to LE15 per gramme in the same day: "This has never been the case before. This fact has upset the market because it added to the uncertainty of trader and consumer alike." He added that oil prices have reflected negatively on the gold market as many countries sought to increase their gold cover in the face of political turmoil. According to Mo'az Barakat, executive manager of the World Gold Council in the Middle East, Turkey and Pakistan, international demand on gold declined by 16 per cent during the first quarter of the year, compared to the same period in 2005, when it reached 835 tonnes while increasing as a dollar value by nine per cent. "Meanwhile, demand on gold accessories also declined in the Middle East by 25 per cent during the first quarter of the year, compared to last year, due to the fluctuating prices. In Egypt, the decline in demand is estimated at 36 per cent and accompanied by a decrease in the number of tourists to Egypt." Because gold has a role to play as a portfolio diversifier, gold exchange-traded funds have recorded the highest records since 2004 as many countries have shifted to gold as an investment in the pension and retirement funds.
