BUSINESS

Oil prices inflated on Egypt, Libya turmoil despite ample global supplies

08/15/2013 04:58 EDT | Updated 10/15/2013 05:12 EDT
NEW YORK, N.Y. - The price of oil rose slightly Thursday as traders reacted to increasing violence in the Middle East despite ample global supplies.

Benchmark West Texas Intermediate crude rose 48 cents to US$107.33 a barrel on the New York Mercantile Exchange. Brent crude, a benchmark used to price imported crude purchased by many U.S. refineries, rose 91 cents to US$111.11 a barrel.

The trouble spots right now are Egypt, which is under a state of emergency; Libya, where strikes at oil facilities have curtailed production, and Iraq, where a bomb attack halted oil flowing through an export pipeline. Analysts estimate that concerns about those countries have added US$6 or more to the price of oil.

The simmering turmoil in Egypt erupted Wednesday, as clashes between police and supporters of ousted Islamist president Mohammed Morsi killed 525 people and injured 3,700. Egypt is not a major oil exporter, but traders worry that the violence could spill over to more important oil exporting countries or disrupt major oil transport routes that cross Egypt.

"The situation in Egypt deteriorated significantly," analysts at Commerzbank in Frankfurt said in a report. "This makes any return to a more peaceful situation in this country — which plays a key role in the entire region's stability — impossible."

Libya is having an even greater effect on oil prices, analysts say. Strikes at oil facilities have helped cut Libyan production to 650,000 barrels a day from 1.65 million barrels a day a year ago. When the country's oil production stopped completely during the revolution in 2011 oil rose by $20 a barrel over the span of two weeks.

Occasional attacks on a pipeline linking Iraq and Turkey have also prevented supplies from reaching global markets in recent weeks.

A drop in U.S. supplies has also pushed prices higher by raising hopes of an improving economy that would need more diesel, gasoline and jet fuel. Supplies have dropped six of the past seven weeks, declining by more than 30 million barrels over that period, according to the U.S. Energy Department. The U.S. consumes 18.5 million barrels of crude and petroleum products a day.

But rising oil production in the U.S., Canada and elsewhere in the Americas has helped keep the market well supplied with oil. Even with recent decline, U.S. stockpiles remain near the top of their five-year average and global demand growth is expected to be modest.

U.S. crude production rose to 7.6 million barrels per day last week, the highest weekly total since December of 1989.

Judith Dwarkin, chief economist at ITG Investment Research, said the higher prices are the result of "short-term nervousness" and that higher production and supplies are preventing a sharper rise in oil prices like the one seen in the spring of 2012 when Brent Crude surpassed US$125 a barrel.

"It's providing a psychological and actual cushion," she says of higher production outside of the Middle East.

That has Dwarkin forecasting lower oil prices in the coming months. She observed that the price of oil to be delivered next month is much higher than the price of oil to be delivered further in the future. That suggests prices will come down if the Middle East violence doesn't spread.

In other energy futures trading on Nymex, heating oil rose two cents to close at US$3.07 a U.S. gallon (3.79 litres), wholesale gasoline was unchanged at US$2.98 a gallon and natural gas rose eight cents to $3.42 per 1,000 cubic feet.

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