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The Oil Market Prepares for a Shock
// Energy Resources
Last week, prices on the oil market came even closer to those of the “oil shock” of 1979. It looks like the traders are seriously aiming at the record from those times - $80 per barrel.
Last week, oil prices again began reaching new heights. The cost of Urals oil has exceeded $40 per barrel; on Friday, its quotations went as high as $40.90 per barrel. Brent oil reached $44.30 per barrel. Since the beginning of the year, that oil has grown by 50%. The only time when oil prices were higher was in 1979, after the “oil shock,” when a barrel of oil cost more than $80.
The current rise of oil prices has both fundamental and psychological causes. The first is the high demand for oil. Economists have estimated that the only time oil prices grew faster than now was three years before the record year of 1979. Production of oil is obviously lower than demand. The OPEC countries are producing as much as they can, and the only real possibility to increase oil production is if Saudi Arabia starts producing more, which it is going to. It is expected that, by next month, Saudi Arabia will increase its production by 10 million barrels a day. The only time in history when this country produced as much oil was after the record prices of 1979.
The psychological reasons have to do with the “bulls” playing on factors that may cause a decrease in supply in the future. Iraq is the cause of main concern. The new splash of military activity in the country has caused terrorists to announce that they are willing to blow up active oil pipelines. But even without the terrorists, the maximum export of Iraq is 1.8 million barrels a day, which is much lower than before the war. The traders are also concerned by the situation in Venezuela, which now supplies 2.5 million barrels a day. Yesterday, they held a recall referendum on the president but, regardless of the results, a surge of violence is expected in that country. YUKOS has not been forgotten either. The possibility of the company’s termination of exports is seen as real. All that put together creates the threat of an 8% loss of world oil production, which is sure to affect prices.
Aleksey Baibakov
All the Article in Russian as of Aug. 16, 2004
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