Crude oil tops top $51 a barrel

Wednesday, October 6, 2004

WASHINGTON -- Oil prices darted above $51 a barrel Tuesday as output in the Gulf of Mexico remains in shambles more than two weeks after Hurricane Ivan tore through the region.

Even as the advance in crude futures begins to appear unstoppable, with traders saying $55 a barrel seems possible, some analysts are convinced a speculative bubble has formed. They say prices have become inflated as institutional investors, such as hedge funds and mutual funds, pile on bets in the energy markets.

Light crude for November delivery soared $1.18 to settle at $51.09 a barrel Tuesday on the New York Mercantile Exchange -- the highest level in the exchange's history.

"Oil has become the only game in town," said Fadel Gheit, senior vice president of oil and gas research at Oppenheimer & Co. in New York. "Every other investment vehicle has disappointed over the last 12 months."

But disappointment over stock market returns isn't the only factor driving institutional investors to energy futures.

Tuesday's price surge came as traders remained nervous about violence in oil-producing giants such as Nigeria and Iraq and concerned about the slow pace of recovery in Gulf of Mexico oil output.

BP PLC said Tuesday that its daily output in the region is nearly 57 percent below normal and that it does not expect production to be fully restored until the end of the month.

Oil production in the Gulf of Mexico is more than 3 million barrels per week below average, putting U.S. crude inventories at historically tight levels and placing extra importance on imports at a time when the market is already nervous about possible supply disruptions around the globe.

On Wednesday, the Energy Department will release its weekly petroleum supply report. The nation's inventory of commercially available crude oil stood at 272.9 million barrels on Sept. 24, down 4 percent from a year ago.

"The market could keep going up in the near term until there is definite visibility that additional oil tanker loadings in the Middle East actually start to appear," said George Gaspar, an oil analyst at R.W. Baird & Co. in Milwaukee.

But Gaspar doesn't believe worldwide oil output is inadequate to meet actual demand. "There's an enormous amount of speculation in the market today," he said.

There is plenty of uncertainty in global oil markets to speculate about:

-- In Nigeria, on-again, off-again talks between rebels and the government plague production in the Niger Delta -- which churns out more than 2 million barrels per day and is America's fifth-largest source of crude.

-- The supply of distillate fuel, which includes heating oil and jet fuel, is also tight, raising concerns among traders because the home-heating season is just around the corner.

-- Daily output in the Gulf of Mexico is 27 percent below normal at roughly 1.2 million barrels, according to the federal Minerals Management Service.

Other factors in the spike include frequent attacks by insurgents on Iraqi pipelines and fear over the Russian supply after oil giant Yukos warned that output might suffer due to a multibillion dollar back-taxes bill.

But some market observers believe current demand levels are being artificially exaggerated by the stockpiling of crude in countries such as China and India.

Gheit does not believe supply-demand fundamentals are the main reason why oil is trading above $50 a barrel.

"Energy has attracted a lot more nontraditional investors," Gheit said. "It's the same situation that happened five to six years ago when the Internet bubble formed and attracted everybody who knew nothing about technology."

"The only question is when this bubble bursts," he added.

Oil prices are nearly 70 percent higher than a year ago, but when adjusted for inflation, still remain around $29 below the level reached in 1981.

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