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Financial Times: Crude oil price likely to hit peak

By Javier Blas in London
Last updated: October 29 2007 08:08

Crude oil prices appear increasingly likely to hit a record in real terms reached during the second oil crisis in 1979, as nominal prices on Monday continued rising well above $90 a barrel.

West Texas Intermediate crude hit a fresh nominal all-time high of $93.20 a barrel oon Monday on a combination of renewed geopolitical tension over Iran’s nuclear programme, weakness of the US dollar and low inventories.

The price leap came after Mexico said it was shutting about 600,000 barrels a day of oil output, or 20 per cent of its total, due to bad weather in the Gulf of Mexico. Authorities hope to restore output in the near term as the cold weather front moves away from the production and terminal areas.

WTI moved $1.34 higher in early trading on Monday to a fresh nominal all-time high of $93.20 a barrel. It later pared gains to traded$1.03 higher at $92.89. Brent crude oil also continued upwards, hitting for the first time the $90-a-barrel key level, before easing back to stand $1.15 higher at $89.84 a barrel.

Barclays Capital’s technical analyst said: “The bull channels keep our focus higher towards $93.45, with little standing in the way of $100 above there.”

In real terms, adjusted for inflation, oil is at its highest price since the early 1980s but still below its modern historical peak – equivalent to about $100-$110 a barrel in today’s money – reached in late 1979 after the Iranian revolution.

Oil traders said that strong speculative flows, Middle East tensions and supportive fundamentals could push crude oil prices towards, if not above, their real term record.

Even so, some analysts remain dismissive about the potential impact of reaching such a level, as the factors behind the price increase are different.

Adam Sieminski, chief energy economist at Deutsche Bank in Washington, said that the current price increase, driven by demand, was different from the 1979 crisis. “That crisis was driven by a supply shortage and turmoil in the Middle East. That has wider implications on business and consumers’ psychology,” he said.

Peter Voser, Royal Dutch Shell’s chief financial officer, last week said that record oil prices were being driven by speculation and political tension, not a lack of supply.

There are also discrepancies among energy economists on which level represents the true adjusted record, as WTI futures did not exist in the early stages of the second oil crisis in 1979. That obliges to use for the calculation other crude oils streams that are not exactly comparable.

There is also disagreement about which inflation measure should be used to adjust the price – world inflation or US inflation. But most agree that $100-$110 a barrel will represent roughly the real terms record.

A measure taking account of the evolution over time of the rich countries’ per capita income has crude oil prices well below the adjusted record. G7 per capita income is now sufficient to buy 456 barrels of crude oil, well above the 320 to 350 barrels between 1980 and 1982.

To bring G7 purchasing power down to this level would require oil prices rising to between $120-$130 a barrel, according to Deutsche Bank.

Copyright The Financial Times Limited 2007

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