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Financial Times: Oil tops $92 on inventory concerns

By Javier Blas in London
Published: October 26 2007 07:49 | Last updated: October 26 2007 07:49

Crude oil prices on Friday breached $92 a barrel to hit a fresh all-time high, driven by low inventories ahead of the winter peak season, fresh geopolitical tension between the US and Iran and the weakness of the US dollar.

Nymex December West Texas Intermediate jumped in London early morning trade by $1.59 to an intraday record of $92.05, after rising $3.36 to $90.46 on Thursday. The oil price is up almost 50 per cent since January.

The dollar fell to $1.4336 against the euro, just shy of the record low of $1.4349 struck earlier in the week. Its weakness together with fears of a oil-induced higher inflation helped to boost spot gold to a fresh 28-year high of $775.30 an ounce.

Washington on Thursday announced new sanctions against Iran, the second largest oil producers of the Organisation of the Petroleum Exporting Countries (Opec), targeting the international arm of the country’s powerful Revolutionary Guard and the country’s largest bank.

Condoleezza Rice, US secretary of state, and Hank Paulson, Treasury secretary, called for other countries and international financial institutions to follow suit. “These actions will help to protect the international financial system from the illicit activities of the Iranian government,” Ms Rice said.

ICE December Brent rose $1.79 to $89.27 a barrel, a fresh record, in early Friday trading after closing at $87.48 on Thursday.

The rise in the price of the Brent contract is particularly important for the refinery industry, as North Sea crude oil serves as a benchmark for most of the physical West Africa and Middle East oil traded in the Atlantic basin.

Nauman Barakat, a senior vice-president at Macquarie Futures in New York, said that prior to this week’s US inventories drop, the perception was that the market was being driven by external factors.

“But the latest numbers, indicating a draw of more than 5m barrels in crude, when the consensus was a build of 1m barrels, is an indication that the fundamentals are also coming into play,” Mr Barakat said.

Edward Morse of Lehman Brothers in New York said geopolitics and financial flows continued to drive the short term oil market, “with fundamentals showing a more mixed picture, leaving the door open for a possible price correction should headlines subside.”

Royal Dutch Shell, Europe’s biggest oil company, warned on Thursday that record high oil prices were being driven by speculation and political tension, not a lack of supply.

Traders said that financial flows were pushing oil prices, as some investors sought refuge in crude oil as a hedge against the weakening of the dollar.

The large number of call options – contracts that give the right to buy at a predetermined price – at $90 and $100 for the December contract were also contributing to price rises. The cost of buying the $90-a-barrel options surged 80 per cent in minutes as the December futures contract jumped above the strike price.

Barcalys Capital technical analysts said the next resistance for Nymex December oil contract was around $93.45 a barrel, suggesting further prices increases. However, they also warned that the market was overbought and risked a correction.

In spite of record prices and a large drop in inventories, the Opec reiterated on Thursday that the market was well-supplied.

“There is no interruption of supply. There’s a lot of oil in the market”, said Abdalla El-Badri, Opec’s secretary-general.

The oil cartel, which supplies more than 40 per cent of the world’s crude oil, will review the market at a head of state summit in Saudi Arabia in mid November and at a ministerial meeting in early December in United Arab Emirates.

Chakib Khelil, Algerian energy minister, added: “The high prices are not coming from a lack of production.” Venezuela echoed those comments.

However, there are growing signs that Saudi Arabia, the cartel’s leader, might push for a production increase after calls from Saudi Arabia and China, the two largest oil consumers.

Copyright The Financial Times Limited 2007

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