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Oil hits $120 record over supply disruption and US economy hopes

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Oil hits $120 record over supply disruption and US economy hopes

By Chris Flood in London

Published: May 6 2008 03:00 | Last updated: May 6 2008 03:00

Oil prices hit a record of more than $120 a barrel yesterday, driven by fresh supply disruptions in Nigeria and a growing sense of optimism that the US economy might escape recession.

Nymex June West Texas Intermediate reached $120.36 a barrel before ending trading in New York $3.65 higher at $119.97, while ICE June Brent surged $3.43 to $117.99 a barrel after reaching a new peak of $118.58.

Hopes of the US economy avoiding recession were lifted by yesterday’s unexpected increase in the April ISM service-sector survey, which followed employment data on Friday that was better than expected.

Demand from China ahead of the Olympics has helped to drive oil prices up by 25 per cent this year, although demand growth in the US has been sluggish because of the downturn in the economy. Traders are unsure what level oil prices could reach once US demand starts to recover.

The entire WTI futures curve is trading well above the $100-abarrel level with the longest dated contract for December 2016 up $1.57 to $110.55 a barrel yesterday, signalling the market’s consensus that $100 oil is here to stay. Hussein Allidina of Morgan Stanley said: “The global oil market currently has very little margin for error with spare capacity constrained. Any supply side disruptions . . . as in the case of Nigeria, are going to contribute to prices moving higher.”

Violence and supply disruptions have escalated in Nigeria in the past month. Royal Dutch Shell has been forced to reduce output after another attack by militants on Saturday.

ExxonMobil, the largest foreign oil producer in Nigeria, has restarted 300,000 b/d of production from a total of 800,000 b/d that was closed because of a strike. However, it has not provided any indication of when full production will be restored.

Record oil prices and rising food costs are pushing inflation higher globally and providing a headache for central bankers who would like to cut interest rates to counter the current strains in money markets.

Petrol prices in the US have also reached record levels and are developing into a hot topic in this year’s presidential election battle after senator Hillary Clinton proposed a windfall tax on oil companies’ profits and backed the suspension of a petrol tax for consumers over the summer.

Nigerian attacks, Page 41 Global Overview, Page 42 www.ft.com/commoditiesboom www.ft.com/oil

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