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Shortage fears push oil futures near $140 up more than $9.50 on the day

Shortage fears push oil futures near $140

By Carola Hoyos and Javier Blas in London

Published: May 20 2008 19:06 | Last updated: May 21 2008 00:52

Fears of a shortage within five years propelled long-term oil futures prices to almost $140 a barrel on Tuesday, further stoking inflationary pressures in the global economy.

Investors rushed to buy oil futures contracts as far forward as December 2016, pushing their prices as high as $139.50 a barrel, up more than $9.50 on the day. The spot price hit a record $129.60 a barrel.

Veteran traders said they had never seen such a jump and said investors were increasingly betting that oil production would soon peak because of geopolitical and geological constraints.

Neil McMahon, of Sanford Bernstein, said: “Peak oil views – regardless of whether right or wrong – are seeping into the market and supporting high prices.”

Anne-Louise Hittle, of Wood Mackenzie, added that investors were shifting their focus from the short-term to the medium-term, where supply fears played a bigger role. Since January, long-term futures oil contracts, such as those for delivery in 2016, have jumped almost 60 per cent, while near-term prices have gone up 35 per cent.

That trend was exacerbated by T. Boone Pickens, the influential investor who believes world oil production is about to peak as aging fields run dry. He warned that oil prices would hit $150 a barrel by the end of the year.

“Eighty-five million barrels of oil a day is all the world can produce, and the demand is 87m,” Mr Pickens told CNBC. “It’s just that simple.”

Mr Pickens’s view is still in the minority in the oil industry. But concerns over future oil supplies are fast moving into the mainstream and influencing investors.

Politicians have expressed concern that speculators are forcing prices higher and Joseph Lieberman, the influential senator, said he was considering legislation to limit big institutional investors in commodities markets.

Some energy executives have warned that geopolitical supply constraints will mean production will not be able to match demand as early as 2012 to 2015.

This comes as demand, especially from China, is set to continue to grow, while that of the US slows. Adam Sieminski, chief energy economist at Deutsche Bank, said: “The price is going to go up until governments that subsidise oil consumption in Asia and the Middle East can no longer afford it.”

So far China is doing the opposite, having recently retrenched subsidies. Analysts say Chinese demand could surge further as the country faces shortages of coal and hydropower.

Nervousness about Chinese energy demand was exacerbated on Tuesday when officials said 32 power plants had been forced to close because of coal shortages.

PetroChina and Sinopec, the two biggest domestic oil groups, also have diverted fuel supplies to the quake-hit Sichuan region.

Additional reporting by Geoff Dyer in Beijing

EDITOR’S CHOICE

In depth: Oil – Apr-29

US begins to break foreign oil ‘addiction’ – May-19

 

Copyright The Financial Times Limited 2008

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