'Fear factor' will ensure oil prices remain high - survey  

By Neil Behrmann

The price of crude oil will rise to $80 a barrel by the end of the year despite the Middle East ceasefire, according to consensus forecasts, held in August.

A survey by research firm IDEAglobal has found that the forecast range is $77 to $100, compared with current quotes of around $73 a barrel, because of global supply worries, concerns about a Western showdown with Iran and the global threat of terrorist attacks.

Oil prices have surged in the past month because of the Israeli-Hizbollah conflict and a BP refinery shutdown in Alaska .

Leo Drollas, economist at the London-based Centre for Global Energy Studies, has a model which shows that oil prices have a built-in US$20 'fear factor'.

If the market were to respond to actual annual supply and demand of oil, currently matching each other at around 84.7 million barrels a day and at current global commercial stocks which can satisfy around 54 days of demand, the price would be around US$53 a barrel, he said.

It is understandable why oil analysts are predicting $80 a barrel, he said. Worries include the Aug 31 United Nations deadline for Iran to agree to halt its nuclear programme. A showdown could lead to Iran cutting its oil exports.

Meanwhile, internal economic and social discontent is prevalent in Venezuela , a major oil producer, and Venezuelan President Hugo Chavez is a supporter of the Iran regime.

The persistent threat of hurricanes disrupting oil refiners in the US and elsewhere adds to the uncertainty.

Nigeria , another important oil producer, could account for a sizeable proportion of the fear premium, maintained Dr Drollas.

Kidnappings and attacks on infrastructure in the Niger Delta cut Nigerian production by 750,000 barrels a day in July, according to the International Energy Agency.

The oil market mainly requires light, low sulphur crude and shortages of this type cause price spikes.

Around four-fifths of spare oil capacity is heavy 'sour' crude from Saudi Arabia which is expensive to refine into products such as petrol and jet fuel.

Nigerian and other West African crudes are higher quality crudes and Angola has become a leading oil supplier to China .

The New York and London futures and options markets are also major influences on prices and daily trading volumes on both markets are equivalent to more than 500 million barrels a day, Dr Drollas said.

The futures market is 'demand biased' as airlines and other oil buyers hedge against price increases by purchasing derivatives, he noted.

Hedge funds and other speculators have jumped on the bandwagon and boosted prices further, he added.

At some point a speculative sell-off could take place but it is difficult to predict when, Dr Drollas said.

Comment:- The extent of bullish comment about oil contrasts with the bearish views in 2001 and 2002 when prices were less than half current levels.  Any slow down in the global economy could well crimp both oil demand and optimistic price forecasts.

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