Oil Rises Above $96 on Expected Supply Drop, Turkish Air Strike

Crude oil rose above $96 a barrel in New York for the first time this month as a government report tomorrow may show a U.S. inventory decline and as Turkish planes bombed suspected Kurdish sites in northern Iraq.

Supplies probably dropped 1.75 million barrels in the week ended Dec. 21, according to the median of nine responses in a Bloomberg News survey of analysts. The Turkish strikes were the latest in a series of cross-border attacks on the outlawed Kurdistan Workers Party, or PKK.

The Turkish attacks are factored in but this isn't a new problem and it has had no impact on the oil flow, said Addison Armstrong, director of market research at Tradition Energy in Stamford, Connecticut. In oil inventories, we're looking for the sixth straight weekly withdrawal. Crude stocks fell below the five-year average last week and are clearly tightening.

Crude oil for February delivery rose $1.63, or 1.7 percent, to $95.76 a barrel at 11:31 a.m. on the New York Mercantile Exchange. Oil reached $96.54 today, the highest since Nov. 27. Futures touched a record $99.29 on Nov. 21 and are up 57 percent from a year ago.

Trading has been lighter than usual because of the end-of- year holidays. Nymex oil traders exchanged 81,634 contracts on Dec. 24, down 82 percent from a week earlier, according to data compiled by Bloomberg.

The main thing today is that this is a thin, volatile market, Armstrong said. If someone wants to push this market, they clearly can.

The Energy Department is scheduled to release its weekly report on inventories tomorrow at 10:30 a.m. in Washington, a day later than usual because of Christmas.

Bombing Raid

Today's bombing raid was at least the third air operation in Iraq this month. Troops were briefly sent across the border on Dec. 17, according to the army. Turkey says it is using intelligence from the U.S. to target the PKK.

Iraq has the world's third-largest crude-oil reserves. The country's northern region is controlled by a semi-autonomous Kurdish administration. Kirkuk, at the center of the region's biggest oil field, is about 100 miles (161 kilometers) from the Turkish border.

Exports from northern Iraqi fields, which run by pipeline to Turkey's Ceyhan export terminal on the Mediterranean Sea, averaged 400,000 barrels a day last month.

The ongoing Turkish air attacks are an excuse to push prices to the upside, said Tim Evans, an energy analyst at Citigroup Global Markets Inc. in New York. It's debatable whether this will have any effect on Iraqi shipments.

Falling Dollar

Crude-oil prices also rose because the U.S. dollar fell against the euro, which bolstered the appeal of commodities as a hedge against inflation. Weak Christmas retail sales in the U.S. indicate consumers are starting to feel pressured by the slowdown in the housing market. The U.S. uses about 25 percent of the world's oil.

Brent crude for February settlement rose $1.45, or 1.6 percent, to $94.15 a barrel on London's ICE Futures Europe exchange.

$100 Oil May Mean Recession as U.S. Economy Hits Danger Zone

Rising fuel prices that businesses and consumers took in stride earlier this year may now be near the point of pushing the weakened U.S. economy into recession.

We are in a danger zone, says Nariman Behravesh, chief economist at Global Insight Inc. and a former Federal Reserve economist. It would take two shocks to bring the economy to its knees. We got one shock in the form of the credit crunch. Oil could be that second shock.

Crude-oil prices are poised to cross the $100-a-barrel mark while the U.S. economy is still reeling from a surge in corporate borrowing costs. Europe and Japan are vulnerable as well, after the U.S. subprime-mortgage collapse contaminated their credit markets.

Even before the latest jump in energy costs, economists expected U.S. growth to slow to less than 2 percent in the fourth quarter -- half the third quarters pace. Andrew Cates, an economist at UBS AG in London, said his models suggest a 45 percent chance of a U.S. recession next year, up from 33 percent last month, as oil prices prove a growing concern.

Japan risks its fourth recession since the early 1990s, with its index of leading economic indicators falling to zero for the first time in a decade. The European Commission last week cut its 2008 growth forecast for the 13 nations that share the euro to 2.2 percent from 2.5 percent, partly because of costlier crude. The economy grew 2.8 percent last year.

Energy Efficiency

The world economy may still dodge recession as emerging markets continue to expand. A report last week by Deutsche Bank AG said gains in energy efficiency mean the effect of more expensive oil will remain muted.

Even so, gloom is spreading at a speed that suggests were walking a really fine line, says John Silvia, chief economist at Wachovia Corp. in Charlotte, North Carolina. Even a month ago, you probably wouldnt have thought wed be seeing a sustained credit problem and oil holding up above $85 a barrel.

Crude oil traded at a record $98.62 last week on the New York Mercantile Exchange and ended the week at $96.32, bringing its increase this year to 58 percent. Prices adjusted for inflation exceed the previous record, set in 1981 when Iran cut exports.

The dilemma for central banks is how to balance oils drag on their economies against the risk of higher inflation. Fed Chairman Ben S. Bernanke told Congress Nov. 8 that oil prices threaten both renewed upward pressure on inflation and further restraint on growth.

Accelerating Inflation

Such concerns prompted the European Central Bank to keep interest rates on hold last week, and President Jean-Claude Trichet said he still sees a danger that inflation will accelerate.

Clayton Jones, chief executive officer at Rockwell Collins Inc., says central bankers should err on the side of supporting growth. Jones, whose Cedar Rapids, Iowa-based company makes aircraft-cockpit instruments, said in an interview that hes much more worried about recessionary impacts rather than inflationary impacts.

Manufacturers are among the first to feel the pinch: Rising energy prices are increasing their costs while drooping consumer and business confidence erodes demand.

In the U.S., the Institute for Supply Managements manufacturing index fell to a seven-month low in October as gauges of orders and production declined.

Lower Profits

Peoria, Illinois-based Caterpillar Inc., the worlds biggest maker of bulldozers and excavators, cut its profit forecast on Oct. 19 and said the economy would be near to, or even in, recession in 2008.

The pain doesnt stop there. Rising jet-fuel prices are forcing airlines to curtail expansion plans. Chicago-based UAL Corp.s United Airlines said it may cut capacity in 2008 to make up for higher fuel costs. Cologne-based Deutsche Lufthansa AG is raising fuel surcharges on long-haul flights.

Dallas-based Southwest Airlines Co. is reconsidering our growth rate for next year, because of very significant cost increases, Chief Executive Officer Gary Kelly said Nov. 7.

Meanwhile, U.S. shoppers, who helped propel most of the current expansion, may cut back as gasoline and home-heating costs rise. Retail-sales growth from November through January may be the slowest since 2002, consultant Ernst & Young estimates. Consumer spending accounts for more than two-thirds of the U.S. economy.

Biggest Decline

Heidelberger Druckmaschinen AG, the worlds largest maker of printing machines, last week reported its quarterly profit dropped by almost half, triggering the biggest decline in its shares since 2004. Energy and raw-material costs have made life difficult, says Dirk Kaliebe, chief financial officer of the Heidelberg, Germany-based company.

The pain extends to China and India as governments pare energy subsidies, putting more of the burden on companies and consumers. China increased fuel prices by as much as 10 percent Nov. 1, and India may follow as soon as this week.

The stage is set for a significant slowdown in global manufacturing, says Joseph Lupton, a former Fed economist now at JPMorgan Chase & Co., which predicts industrial-production growth worldwide will decelerate by more than half before the end of this year, to about 3 percent.

The speed of the latest jump in oil prices tests the resilience of economies that weathered previous increases, says David Hale, president of Chicago-based Hale Advisors LLC.

Weve had stages in which the price has gone up over a period of two or three years, he told a Nov. 7 teleconference. The recent price spike from $85 to $96 has happened in just a few weeks, so this will pose more of a risk.

The longer prices remain high, the greater the threat, says Neal Soss, chief economist at Credit Suisse Holdings Inc. in New York.

While Soss doesnt expect a recession, he compares the danger to driving on an icy road: You may get away with it for a while, but the risk of having an accident has gone up.

Source - Bloomberg

How $100 oil would cost you

Brace for record gas prices before the holidays and higher airfares.

Even if the price of oil doesn't breach the $100 mark, its recent rise will soon start to bite - at the pump, the airline ticket counter and possibly in your home.

The price of a barrel of oil has pulled back in recent days, but even at a current $96, gas prices could soon top their all-time record from last May of $3.22 a gallon.

Gas prices rose 14 cents last week and now average $3.04 a gallon nationwide, according to AAA. Many states have had gas over $3 for some time.

In the past few months, drivers have gotten off easy - gas prices hadn't kept up with the increase in oil prices. The main reason: Demand has been fairly tame.

But now, demand is set to pick up into the holiday season.

At the same time, supplies of gas could get tight as many U.S. refiners are undergoing maintenance, according to Schork. And they stand ready to decrease production if gas prices don't move higher, according to Kevin Norrish, a commodities analyst at Barclays in London.

As for next spring, when gas prices usually spike on anticipation of increased demand over the summer, Schork noted that in all likelihood we'll be going into the season with much less in gasoline inventories than last year.

You're that much closer to $4 a gallon gasoline, he said.

Expensive flights

Higher oil prices also mean higher airfare for travelers. As the price of crude rises, jet fuel prices also increase.

Last week, American Airlines - the nation's biggest carrier - raised the price of U.S. round-trip tickets by $20, and other major airlines followed suit.

American said it increased fares in an attempt to offset losses from rising crude oil and jet fuel prices.

Rising oil prices could also mean higher heating bills for those who use oil - mostly that means households in the Northeast, or about 7 percent of the country.

For them, oil's rise will be particularly painful: a 22 percent increase in bills from last year, according to the Energy Information Administration.

The rest of the country doesn't face such steep increases, but they won't exactly get a free ride.

Roughly 50 percent of the country uses natural gas to heat their homes. And while natural gas prices aren't tied directly to the price of crude, those who use natural gas could see a 10 percent increase in home-heating bills.

Norrish expects natural gas prices to rise only modestly in the near future.

People who heat with electricity, about 30 percent of the nation, can expect to pay 4 percent more.

Source - BBC

Gold settles at record high

Investors seek safe haven as the dollar falls on a report that China may diversify its exchange reserves, but one analyst sees rally fading.

Gold settled at a record high of $833.50 an ounce in New York trading Wednesday as the dollar's decline and oil's record surge caused inflation-wary investors to seek stability in precious metals.

The previous high was $825.50, set Jan. 21, 1980, or $2,128.09, adjusted for inflation, according to the Minneapolis Fed Calculator.

Trading in gold offers investors a hedge against stock market volatility because it is a store of value, compared to stocks, which are subject to a variety of unpredictable economic factors.

The euro hit a fresh record against the dollar, rising to $1.4729 before retreating. The dollar was dragged down by a report that a Chinese political figure said that Beijing should favor the euro, not the dollar, in diversifying its exchange reserves valued at $1.43 trillion.

Meanwhile, oil hit a new intraday record at $98.62 a barrel early Wednesday ahead of the government's weekly inventory report that was expected to show a 1.6-million barrel drop in crude stockpiles. Oil's drive to the $100-a-barrel mark slowed when it turned out that inventories were down slightly less than expected. Still, oil has surged more than 20 percent in the past month.

In addition to the dollar's decline and oil's rally, the ongoing fallout of the credit crisis has investors flocking to the relative safety of gold.

But one analyst wasn't so sure the metal will stay in record territory.

Safe-haven buying accounts for only one third of gold consumption, according to Jon Nadler of Kitco Bullion Dealers. He says most gold is used to make jewelry, with the biggest demand coming from India and the United States.

If consumers in India and the U.S. deem the price of gold unacceptable you will begin to see a big shift, Nadler said.

Source - CNN Money

Oil's march to $100 stalls

Crude comes within $1.38 of triple-digit levels, but gains are tempered after U.S. inventories fall less than expected.

Oil prices rose Wednesday and remained within striking distance of $100 a barrel, but the assault on the triple-digit number was thwarted by a report showing supplies in the U.S. fell less than expected.
U.S. light crude for December delivery rose 65 cents to $97.65 a barrel on the New York Mercantile Exchange, after setting a new trading high overnight of $98.62. The price stood at $97.60 just before the inventory report was released.

Oil's assault on $100 a barrel stalled Wednesday after U.S. supplies fell less than expected.

Traders were expecting oil prices to climb following the inventory report. Instead, oil seesawed after the announcement that supplies declined but not as much as expected.

In its weekly inventory report, the Energy Information Administration said crude stocks fell by 800,000 barrels last week. Analysts were looking for a drop of 1.6 million barrels, according to a Dow Jones poll.

Distillates, used to make heating oil and diesel fuel, rose by 100,000 barrels while gasoline supplies fell by 800,000 barrels. Analysts were looking for a 500,000 barrel decline in distillate supplies and a 200,000 barrel gain in gasoline stockpiles.

Most of the decline in crude is being blamed on an outage from Pemex, Mexico's national oil company. Mexico, after Canada, is the second largest source of imported U.S. oil.

While oil has been expected to test the $100 mark for several days, one analyst said crossing the psychologically important threshold may prove a challenge.

Many hedge funds bought when prices were around $80 a barrel, and many may want to cash out and take the $16 or $18 profit without waiting around to see if the $100 level can be broken, according to Peter Beutel, an oil analyst at Cameron Hanover.

We certainly would not risk $16 or more for the last $2 or $3 a barrel, Beutel wrote in a research note.

Prices hit a new record earlier in the day after the International Energy Agency said China and India will sap world oil supplies faster than previously thought.

In its yearly forecast, the agency said under current policies the world will use 50 percent more energy by 2030 than it uses today, with 45 percent of that demand coming from India and China.

The two countries are expected to use nearly four times more oil by 2030, and IEA questioned the world's ability to meet such rampant demand.

A falling dollar also pushed prices higher. The dollar hit a fresh low of $1.4729 against the euro Wednesday on speculation that China would seek to diversify some of its foreign currency reserves.

The falling U.S. dollar has also played a role, as oil worldwide is priced in dollars. Oil-producing nations have less incentive to ramp up output if the buying power they receive per barrel is declining, and foreign consumers have less incentive to reduce demand if oil is, relatively, getting cheaper for them.

Source - CNN Money

What is the reason for high Oil prices?

High crude oil prices could be due to a shortage of oil supplies. High prices for oil products - as purchased by end consumers such as motorists - are more likely to reflect other factors, such as taxation.

Crude oil prices react to the balance of demand and supply in the short term, and the rate of investment in the longer term. If investment is not made far enough in advance, oil supplies could be limited in the longer term, thus raising prices.

Sentiment is also an important factor: if traders in the oil market believe there will be a shortage of oil supplies, they may raise prices before a shortage actually occurs.

Other factors influencing the price of crude oil include accidents, bad weather, increasing demand, halting transport of oil from producers, labour disputes (strikes) as well as other disruptions to production including war and natural disasters.

Crude oil now represents less than a quarter of the price of oil products in many countries. Therefore, taxes have more influence over the price of oil products.

When oil taxes are raised, end consumers often mistakenly blame the oil producers, but it is really their own governments that are responsible.

OPEC seeks a stable oil market, without sudden price changes or excessively high or low prices.

OPEC regularly meets with other oil producers and with consumers in an effort to improve understanding and trust in the oil industry and to seek policies and measures that do not create unnecessary economic hardship for oil producers or consumers.

Source - Commodity Online

Oil hovers near new record around $96

The price of oil rose to a new record above $96 a barrel Thursday after a surprise drop in U.S. crude stockpiles raised concerns about supplies for coming winter demand. Other energy futures also gained.

It was the second week in a row the U.S. Energy Information Administration reported a sharp and unexpected drop in oil inventories.

The decline in U.S. crude oil inventories has been a key driver of oil prices, said David Moore, commodity strategist at the Commonwealth Bank of Australia in Sydney.

Light, sweet crude for December delivery rose as high as $96.24 a barrel in electronic trading on the New York Mercantile Exchange by midafternoon in Singapore before dropping back to $95.59 a barrel.
Crude prices have reached inflation-adjusted highs set in early 1980. Depending on the how the adjustment is calculated, $38 a barrel then would be worth $96 to $101 or more today.

India Trade Deficit Widened to $6.8 Billion in August

India's trade deficit widened in August as companies stepped up imports of oil and machinery to meet demand in the world's second-fastest growing major economy.

The trade deficit jumped to $6.8 billion from $5 billion in July, the Ministry of Commerce and Industry said in a statement in New Delhi today. Imports rose 32.6 percent to $19.5 billion. Exports in August grew 18.9 percent to $12.6 billion.

Imports are climbing as General Motors Corp., Honda Motor Co. and other automakers build new factories in India to cash in on the nation's auto demand, while refiners are buying more crude oil to fuel power generation. Exports have been hurt by the fastest gain in the nation's currency in at least 33 years.

`India's trade deficit is a result of its unprecedented economic growth,'' said D.H. Pai Panandiker, president at RPG Foundation, an economic policy group in New Delhi. ``The deficit is also under pressure because exports turned weak after the strong gain in the currency.''

India's rupee, Asia's best performer, has climbed 11.4 percent this year as international capital flows to the world's second-fastest growing major economy after China. India's economy grew 9.3 percent in the three months to June 30.

Non-oil imports in the April-August period rose 42.9 percent to $66 billion and oil imports gained 8.3 percent to $25.9 billion, today's report said. The trade deficit between April and August widened to $32.5 billion from $19.9 billion in the same period last year.

Rising salaries and borrowing from commercial banks have fueled spending by consumers in the world's second-most populous nation. Hewitt Associates Inc. forecasts salaries in India will climb an average 14.5 percent in 2007, the steepest gain in Asia for the second straight year.

General Motors, Honda, Volkswagen AG and half a dozen other companies plan to spend at least $6.6 billion on new factories. All are betting on a country where 7 people in 1,000 own a car, compared with 450 per 1,000 in the U.S. and 500 per 1,000 in Western Europe.

India's manufacturing growth accelerated in September as rising incomes spurred consumer spending, ABN Amro Bank NV said today. Manufacturing makes up a fifth of India's $854 billion economy.

The bank said its purchasing managers' index rose to 59.1 last month, the highest level since October 2006, from 57.9 in August. A reading above 50 indicates factory output gained.

Source - Bloomberg

Indian crude oil basket hits $78.46 a barrel

The basket of crude oil that Indian refiners buy hit another all-time high of $78.46 a barrel on Friday, the latest day for which data is available.

The high prices have pushed up revenue losses of the country’s three oil marketing companies to Rs 210 crore per day from Rs 190 crore a day in the first 15 days of September.

The government is, however, still sticking to its guns by not increasing retail selling prices of petrol and diesel. There is very less chance of a hike in prices of petrol and diesel. The government is under huge political pressure, and could face mid-term elections, said a senior official of the petroleum ministry. Fuel prices are more about politics than economics, the official added.

The official, however, said the Cabinet was closely observing the movement of the price of the Indian crude oil basket. We are keeping the Cabinet updated all the time, the official said.

The Indian basket, which comprises Oman-Dubai sour (high sulphur) grade crude oil and Brent dated sweet (low sulphur) crude oil in a 59.8:40.2 ratio, averaged $74.83 a barrel in September. In August the average price of the basket was $69.03 a barrel.

The prices of petrol and diesel were last increased in June 2006 when the average price of the crude oil basket was at $67 a barrel. The rupee was then valued at around 45 per dollar.

Since then, the value of rupee has risen to below 40 per dollar. This effectively makes the value of the crude oil basket around $72 a barrel, as the oil marketing companies are now paying lesser in terms of rupee for the crude oil they buy.