Price of oil surpasses $54 a barrel; supplies a concern

International agency raises demand forecast for ’04, lowers 2005 forecast slightly; global production capacity only about 1% above daily demand

Brad Foss

Associated Press Business Writer

Oil futures prices surpassed $54 a barrel Oct. 12 on supply concerns in Nigeria and the Gulf of Mexico, where hurricane damage to pipelines and production platforms could curb output for months.

Meantime, the International Energy Agency, a Paris-based energy watchdog for oil-consuming countries, on Oct. 12 raised its demand forecast for 2004 to 82.4 million barrels per day, on average, an increase of 240,000 barrels per day.

Crude for November delivery rose as high as $54.05 Oct. 12 on the New York Mercantile Exchange before retreating to $53.85 per barrel, an increase of 21 cents from Oct. 11’s record settlement of $53.64 per barrel.

While oil prices are more than 80 percent higher than a year ago, they are still about $26 below the peak inflation-adjusted price reached in 1981. Underlying daily jitters is that excess available output is scant, with global production capacity only about 1 percent above the daily demand.

2005 demand forecast down slightly

In Nigeria, a nationwide strike to protest higher fuel prices began Oct. 11, shutting down most of Lagos, Nigeria’s commercial capital.

Royal Dutch/Shell Group said its Nigerian output would be cut by 20,000 barrels a day due to a ruptured pipeline, though a London-based spokesman for the company said the problem did not appear to be related to the labor strife. Otherwise, the country’s output of 2.5 million barrels per day has not been affected.

Traders are jittery nevertheless because Nigeria produces low-sulfur crude, which is in high demand for the production of transport fuels.

The four-day strike takes place just after a militia group and the government reached a tentative peace deal.

The market is also closely monitoring the slow recovery of production in the Gulf of Mexico, where 17 million barrels of oil production have been lost since Hurricane Ivan whipped through the region a month ago.

Repeated efforts by the Organization of Petroleum Exporting Countries to lower prices by boosting output have been largely ineffective because the fuel they offer to the market has a high-sulfur content, which is less desirable among many refiners.

Billions more in E&P investment possible

“No one suggests there would be an industry-wide knee-jerk reaction to a change in the OPEC target. Instead, analysts and company finance directors say it could bolster the belief that higher prices are here to stay,” the Dow Jones report said.

“If the cash flow goes back, we could be talking about a 20 percent increase in capital spending,” Energy analyst Adam Sieminski of Deutsche Bank was quoted as saying.

Citigroup SmithBarney estimated “possibly $40 billion-$50 billion in extra capital expenditure a year for the oil industry could flow in if OPEC raises its price band by $5.”