Oil prices could top US$100

OIL PRICES are set to hit US$105 a barrel in the near future, according to a study conducted by Goldman Sachs.

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By  Massoud A. Derhally Published  April 10, 2005

OIL PRICES are set to hit US$105 a barrel in the near future, according to a study conducted by Goldman Sachs. The report, completed two weeks ago, claims oil markets will enter a “super-spike” period that could push prices well above US$100 a barrel. Goldman Sachs’ oil research team said: “Only a sharp sustained increase in energy commodity prices will meaningfully reduce energy consumption and recreate the kind of spare cushion that existed through much of the 1980s and 1990s.” The publication of the report follows a meeting of the Organisation of Petroleum Exporting Countries (Opec) where crude oil prices were increased to just over US$58 a barrel. The introduction of a production ceiling to calm the overheated market was also discussed at the meeting. Prices have climbed up some 28% throughout the year, largely on the back of a perception that there is a supply shortage. This is in addition to increasing demand from Asia, namely China, which has recorded an average of 10% growth over the last few years. “There is increased demand in the US, Europe, as well as in Asia, that’s what driving the price so far,” said Johnny AbedRabbo, a senior economist at National Commercial Bank, the largest bank in Saudi Arabia. “On top of that, there are really tight supplies out of the region, which is driving the price up,” he added. Saudi Arabia is the biggest oil producer in the Opec cartel, currently pumping close to 9 million barrels per day (bpd). Nevertheless, the kingdom could pump an addition 1.5-2 million bpd. Other events have also contributed to a sudden increase in oil prices. A major refinery in Venezuela was recently forced to shut down because of a power failure, in addition to a large explosion at a BP refinery in Texas. The implications for the Arab world are relatively good. For Arab oil-producing countries the increase in price will translate into yet another year of windfalls, helping to fuel the ongoing construction boom in the Gulf and bringing greater liquidity to markets. For non-oil producing Arab countries however, the situation is a little different. Many of the poorer countries such as Jordan, Syria and Lebanon, usually receive their oil in the form of aid or grants. But there are also instances where countries have had to adjust their budgets or even borrow to make up for the rise in prices. For those countries, much of the money that makes its way to oil rich countries trickles down. For example, Jordan used to receive preferential treatment from Iraq and Lebanon from Saudi Arabia. AbedRabbo said he didn’t believe Opec possessed the latitude it once did to influence the price of oil. “They used to in the past, when they had a strict monopoly on oil supplies. Now it’s not as prevalent as it used to be. There are more producers elsewhere that can impact prices. In fact we might even see some investment going to the Caspian again because that’s what happens when prices go up, you see investors putting money there,” said AbedRabbo. Early last week, Sheikh Ahmed Fahad Al Ahmed Al Sabah, Kuwait’s energy minister and president of Opec, said members of the cartel would be adopting a ‘wait and see’ approach to see how prices behaved over the coming weeks, adding that if production capacity changed, it would be in May. “Until now, there is no shortage in the market,” said Al Sabah. “I think if prices continue to increase, we should increase [by] 500,000 bpd,” he added. Opec increased its production ceiling by 500,000 bpd to 27.5 million bpd at its last meeting in March and said it might provide for another 500,000 bpd if crude prices do not stabilise. Oil prices retreated to US$55.85 a barrel last week after US petroleum inventory data revealed supply was higher than expected. The continued fluctuation in oil prices is having a wide impact on regional industries. Hardest hit are airlines, such as Gulf Air, which claimed that it had been denied a US$80 million profit in2004 because of the rise in prices. Most airlines, including both Gulf Air and Emirates Airline, have continued to pass on a portion of fuel surcharges to their customers, with others going for a direct increase in ticket prices at point-of-sale.

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