Oil price of $100 a barrel on horizon – Financial Times

Financial Times, 03/09/2008

By Javier Blas and Carola Hoyos in London and Michael Mackenzie in New York

Published: September 2 2008 20:17 | Last updated: September 3 2008 00:03

Oil prices sank to a five-month low of just more than $105 a barrel on Tuesday as traders turned their sights on signs that slower growth was spreading beyond the US into Europe, Japan and even emerging markets.

The fall led some analysts to suggest that oil prices could move back below $100 a barrel, a level not seen since March, after fears that US oil supplies could be severely disrupted by hurricane Gustav proved unfounded.“With the fear of Gustav now gone, a downside ‘speed bump’ will have effectively been removed as far as crude oil prices are concerned, and we expect values to start tracking lower once again,” said Edward Meir, of MF Global in New York.

The slide in oil prices could be short-lived in the light of Iran stepping up efforts to persuade fellow Opec members to cut output when they meet in Vienna next week.

Iran, one of the more influential members of the group and traditionally a price hawk, wants countries to cut output to previously agreed limits to remove supplies left on the market after falls in demand.

If the other 12 members of Opec agree with Iran, this would reduce world oil supply of almost 88m barrels a day by between 500,000 and 1m barrels, probably from October.

Gholam Hossein Nozar, Iran’s oil minister, said the market was oversupplied. “Oil supply must be well proportioned with demand and control over Opec’s excess oil supply is an issue that must be discussed,” he said.

It is not certain that Saudi Arabia will agree with Iran’s aggressive position. The kingdom, Opec’s most powerful member, increased its production to more than 9.5m barrels a day in July, the highest level in more than 25 years, after pressure from consumers, particularly in the US, struggling with high oil prices.

Early indications of August supply, especially to Asian refiners, suggest the kingdom might have already decided to cut back production on some of its higher quality grades of oil, as demand has slipped and prices fallen.

The drop in crude oil prices to a low of $105.40 a barrel, down almost 30 per cent from a record high of $147.27 in July, pushed Wall Street stocks higher, especially in oil-hungry businesses such as airlines. Oil recovered to $108.60.

Oil led a broader sell-off in commodities such as copper, corn and soybeans, with the Reuters-Jefferies CRB index, a benchmark for raw materials, falling to a 6½-month low, down about 18 per cent from July’s peak.

The drop in commodities prices will be welcomed by central banks fighting high inflation and weak growth. The Organisation for Economic Co-operation and Development said that its forecasting models pointed to weaker growth to the end of the year. “Financial market turmoil, housing market downturns and high commodity prices continue to bear down on global growth.”