Reply #138: Forget Cheaper Oil in 2006? [View All]

[UpInArms]

http://www.businessweek.com/bwdaily/dnflash/jan2006/nf20060118_8113_db039.htm

Only a month ago chances seemed good that 2006 would break the streak of five consecutive years of rising oil prices. But not anymore. Less than three weeks into the new year, the prospect that the average price per barrel for light, sweet U.S. crude in 2006 would fall below last year's nearly $57 per barrel look considerably diminished.

Political turmoil in Iran and Nigeria, two key exporters, combined with the Bush Administration's determination to crack down on Tehran's nuclear program are to blame. These factors have sent crude prices back toward the $70-plus high-water mark hit last September when hurricanes battered oil installations in the U.S. Gulf Coast. On Jan. 17 prices jumped more than $2 per barrel to nearly $67. In trading on Jan. 18, oil held onto most of its gains: The price for U.S. benchmark futures contracts for Februrary delivery fell slightly from the previous day's close, to $65.78 per barrel.

The recent surge was prompted by the potent combination of a real cut of more than 200,000 barrels a day in production from Nigeria and fears -- probably exaggerated -- of an output disruption on a far grander scale in Iran. The world can weather the loss of a couple of hundred thousand barrels daily from Nigeria, although the perennial unrest that swirls around the Niger Delta's oil facilities appears to be on an upward curve. But the shutoff of Iranian exports would be a far more serious matter. "Frankly, we couldn't cope with the loss of Iranian oil," says Leo Drollas, deputy director of the Center for Global Energy Studies, a London-based think tank.

FEAR AND LOATHING. The calculus is very simple. The world's spare capacity is about 2 million barrels per day, nearly all of it in Saudi Arabia. The loss of Iran's 2.5 million barrels in daily exports would breach that limit in one shot, sending prices who knows where. "With oil supplies so tightly balanced right now, it doesn't take much to stir the imagination," says Bernard J. Picchi, an analyst at Foresight Research, a New York-based independent research firm. "This wouldn't have happened five years ago," when the world was awash in oil, he adds.

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