Middle East turmoil pushing oil higher again


RISING tensions in the Middle East and the potential for lower crude supplies have pushed oil prices up 19 percent over the past three weeks.

Crude rose US$2.79, about 3 percent, to US$92.66 per barrel yesterday, its highest level since mid-May. The price has risen US$15 per barrel since June 28, when oil hit a low of US$77.69.

The oil market is responding to a series of events in recent days that have raised concerns - yet again - that Iran will try to block oil shipments through the Strait of Hormuz, a narrow waterway in the Persian Gulf through which one-fifth of the world's oil travels every day.

Iran raised this threat late last year after the US and Europe announced sanctions designed to crimp Iran's oil sales, sending oil soaring above US$100 per barrel. Western nations are trying force Iran to abandon what the West says are efforts to develop a nuclear weapon.

Tensions eased, and oil prices fell, when Iran agreed to enter negotiations over its nuclear program.

But in the past few weeks, those negotiations appeared to have failed, a US Navy ship fired on a boat in the Persian Gulf and Iran said it has devised a specific plan to block oil shipments.

Then, on Wednesday, seven Israelis were killed in a suicide attack in Bulgaria. Israel blamed Iran for the attack, and vowed to strike back. Iran has denied involvement.

"It's raised the fear quotient," said Tom Kloza, chief oil analyst at the Oil Price Information Service. "This was more than just talk and taunting."

If oil buyers worry that oil will soon be in short supply, they buy oil futures contracts to lock in the price as insurance against future price spikes. Those purchases drive up benchmark oil prices and can eventually lead to higher prices at the pump.

Brent crude, which is used to benchmark the oil bought by most US refineries, has jumped 21 percent in about a month. On yesterday Brent rose US$2.64 to US$107.80. Brent hit a low of US$89.23 on June 22.

Brent would be most affected by a disruption in the Middle East because it is used to price seagoing crude that competes with crude shipped through the Persian Gulf. Also Brent, which is priced in London, has been pushed higher by lower oil production in the North Sea.

Further increases are possible over the next few wee, but the rise won't likely be dramatic - or long-lived. The growth in global demand for oil has weakened in recent months as the economies of the West have sputtered and China's economic growth has slowed. And oil supplies remain high because output has risen in Saudi Arabia, Libya, the US and elsewhere.

"There's stagnant demand, and lots of supply," said Judith Dwarkin, chief energy economist at ITG Investment Research.

That leads analysts to think that prices won't skyrocket unless supplies are disrupted by Middle East violence or a hurricane in the Gulf of Mexico.

In other energy trading in New York, natural gas rose 2.6 cents to close at US$2.935 per thousand cubic feet. Heating oil rose 7 cents to close at US$2.95 per gallon and wholesale gasoline rose 6 cents to close at US$2.94 per gallon.


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