Oil hits $100 a barrel

Oil hits $100 a barrel

ROMA LUCIW
Wednesday, January 02, 2008

Oil prices surged to $100 a barrel (U.S.) for the first time on record Wednesday, kicking off the New Year by hitting the key psychological mark.

Crude futures for February delivery jumped $4.02 to $100 a barrel at 12:09 EST on the New York Mercantile Exchange, the highest since trading there began in 1983, then eased back down to $99.29. The previous record of $99.29 was reached on Nov. 21, 2007.

Wednesday's surge to $100 marks a nominal record for oil. Prices are also within their range of inflation-adjusted highs set in early 1980. Depending on how the adjustment is calculated, $38 a barrel then would be worth $96 to $103 – or more – today.

Phil Flynn, an analyst at Alaron Trading in Chicago, said the $100 mark is significant only in that it is a big psychological milestone. “It is the number that we talked about back when oil was at $20. Everybody was obsessed with this number and now that we hit it, maybe we can get it out of our system and focus on fundamentals.”

Mr. Flynn expects that crude will pull back to the low $90s in the coming weeks. “In the last week, we have had every bullish oil story we could get. But a lot of these issues are likely not going to impact oil in the coming months.”

He noted that with many traders still off on holidays, volume levels were down by roughly half on Wednesday.

“Apparently there was one trade on the floor that pushed us through $100. We hit a little air bubble of buying and it came right back down,” Mr. Flynn said in an interview. “A lot of the big players in oil are still on holidays and with no one to step in with a cooler head, the market is getting pushed around.”

Crude oil prices have been on a tear and jumped more than 58 per cent in 2007, driven by rising demand in developing nations like China and India, tight inventories and U.S. dollar weakness. The most recent surge was triggered by violence in Nigeria and Pakistan, a spell of cold weather in parts of the United States and anticipation of further decline in U.S. crude stockpiles.

Bart Melek, global commodity strategist at BMO Nesbitt Burns, said that if supply-demand and geopolitical conditions warrant it, there is no longer any reason to think the world cannot cope with $100 a barrel oil. “Once these psychological barriers are broken, they can be broken again quite easily.”

Canadians should be prepared to dig deeper into their wallets for fuel and gasoline, since the surge in crude will translate into higher prices, he said. “People should expect fairly high prices.”
Higher crude might also increase inflationary pressures around the world, which would place the Bank of Canada and its global counterparts in a precarious situation, Mr. Melek said. “The banks must be worried that high oil prices may translate into inflationary pressures and that may slow down the rate at which they lower interest rates.”

Mr. Melek expects that a weakening U.S. economy will weigh on crude prices in 2008. His annual forecast calls for prices to average around $80 in 2008.
Meanwhile, the White House said Wednesday it would not release fuel from the nation's oil reserves to drive down soaring prices, unless there was a true emergency.

“Doing a temporary release of the Strategic Petroleum Reserve is not going to change prices very much,” said White House press secretary Dana Perino. “We know that from past experience.”

Analysts pointed to a myriad of short-term developments that were boosting oil prices on Wednesday, including violence in Nigeria, Africa's largest oil producer.
Bands of armed men invaded Port Harcourt, the centre of the country's oil industry, attacking two police stations and raiding the lobby of a major hotel. Four policemen, three civilians and six attackers were killed, and the increased tensions sparked concern of supply disruptions.
Separately, the Organization of Petroleum Exporting Countries indicated its member nations may not be able to meet their share of global demand as early as 2024, though OPEC also said that deadline could slide for decades if members increase production more quickly.
An ongoing dispute between the U.S. and Iran, OPEC's second-largest producer, also contributed to oil's rally.

On top of that, investors expect that U.S. crude inventories fell by 1.8 million barrels last week, which would be the seventh weekly decline in a row. Supplies of distillates, which include heating oil and diesel, are also forecast to drop on increased demand amid the wintry weather. The weekly government report will be delayed by one day because of the New Year's holiday, and is slated to be released on Thursday.

With files from The Associated Press
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