Although oil prices have stabilised following last week's significant escalation, worries in the international oil bourses have not totally vanished. Sherine Nasr reports Last week, oil prices reached highs not recorded for the past 30 years. In the New York Mercantile Exchange (NYMEX) on 2 August, the West Texas Intermediate (WTI), the American benchmark crude, rose 32 cents to close at $61.89 a barrel for the September delivery. Meanwhile, in London's International Petroleum Exchange (IPE), the North Sea Brent crude oil settled at $60.62 a barrel. "The factors behind the unprecedented increase in oil prices are mainly psychological," said Amr Kamal Hamouda, an oil expert. Hamouda added that the death of King Fahd of Saudi Arabia has triggered prices to rise in the past few days, "thanks to speculators who usually take advantage of unexpected events." A closer look at the international scene however, immediately reveals other equally relevant interpretations to the latest oil price highs. An unexpected military upheaval in Mauritania coincided with the death of John Garang in Sudan. Mauritania was expected to export oil for the first time in 2006, "But now, due to the political unrest, it is difficult to guarantee the safety of the oil facilities set up there. Even more difficult is to know for sure whether the country will go ahead with its exports plans or not," said Hamouda. The situation is no better in Sudan, which possesses one per cent of the world's total crude oil reserves. Sudan produces 1.5 million barrels per day (bpd), most of which comes from the south, a region that recently has witnessed much political unrest. And although oil prices stabilised again earlier this week within the $50 range, oil experts cite several reasons as to why they do not expect this to continue for long. Among such reasons is the fact that the situation in Iraq is getting worse. Although Iraq recently saw the largest increase in output at 160,000 bpd, the Iraqi export rise is unlikely to be sustained, mainly because of the sabotage attacks since the US-led invasion of Iraq in 2003. In addition to the inflammatory situations in many parts of the world, it is important to underline international concern that an over-stretched global refining system would struggle to meet rapidly growing fuel demand. In the US, for example, six major refineries are undergoing maintenance or are being upgraded and expanded which adds more burden on demand for oil products. According to figures released in the July OPEC monthly oil market report, the increase in OPEC capacity over the last two years stands in sharp contrast to developments in world refinery capacity where increases have lagged far behind the growth in demand. The report welcomed the recent agreement by the G8 to consider measures to encourage the expansion of refinery capacity. Noting that OPEC member countries have begun to increase their investment in the downstream, the report noted that without meaningful and timely measures in the primary consuming countries, the high and volatile oil prices are likely to remain a feature of the market. It is worth noting that the output from OPEC's 10 members excluding Iraq, which is exempt from quotas, was at 28.21 million bpd in July, up from revised output of 29.09 million bpd in June. OPEC production was 210,000 bpd above the target of 28 million bpd, which came into effect on 1 July after OPEC raised the ceiling 0.5 bpd at its meeting in June in a bid to dampen prices. "Pumping more crude oil will not provide an answer to spiralling prices. It is important to note that determining oil prices or bringing them down is out of OPEC's hands," said Hamouda. The preliminary forecast for 2006 showed world oil demand projected to average 85.2 million bpd, implying a rise of 1.5 million bpd or 1.9 per cent over total 2005 consumption. The largest contributors to demand growth are expected to be the developing countries and China with an estimated growth of 0.6 million bpd and 0.4 million bpd respectively. According to Hamouda, the approaching winter season may contribute to the price highs. "Although the latest price increases are merely a matter of speculations, it is expected that prices will tend to continue in an upward direction in the future," said Hamouda.
