By Kevin Morrison
Financial Times
July 30 2004

The rise in oil prices to new highs on Friday was driven by the uncertainty surrounding Yukos, the troubled Russian group, and the record level of US oil imports, which were soaked up by strong US demand.

The rise in US demand has displaced some of the other factors that have pushed oil prices higher this year, such as speculative investor interest and dollar weakness.

The fall in the dollar to its lows in February has been used by Opec as a reason for higher prices, but since its lows, the greenback has risen 7 per cent against the euro. Over the same period, oil prices have risen by $10 a barrel.

Kevin Norrish, energy analyst at Barclays Capital, said speculative investors had halved their exposure to Nymex crude futures and petroleum products to 68,000 contracts in the week to July 20, compared with the peak of 144,000 contracts at the beginning of March.

"Speculators have been net sellers of energy futures in the past four months, over which time crude prices have risen $6 (a barrel)," said Mr Norrish.

September Nymex WTI peaked at $43.23 a barrel on Friday, its highest level since crude futures started trading on the New York Mercantile Exchange in 1983 and exceeded the previous peak of $43.05 touched on Wednesday. Prices later eased to $43.13 a barrel, a rise of 38 cents on Thursday's close.

IPE Brent crude for September delivery reached a new 14-year high of $39.78 a barrel in early morning trade in London, up 54 cents from the previous close. The record of $40.95 a barrel touched on October 10 1990 in the lead up to the Gulf war, now looks breakable.

The battle between Yukos and the Russian government has been staged over the past year, but the threat this week by the authorities to halt the company's daily output of 1.7m barrels brought into focus the tightness of the global supply and demand picture. Yukos's output equates to the size of the world's spare sustainable oil production capacity, all of which resides in Saudi Arabia.

With 10 Opec members, excluding Iraq (which is not subject to the cartel's quota system) producing at their highest level in 25 years or since the time of the second "oil shock" that followed the revolution in Iran, spare oil production capacity is now at its lowest in decades.

However oil analysts do not expect the Russian government to close Yukos down, and even if it did, its domestic rivals could make up the difference in the short term. But this would not be sustainable for much more than a few months.

Nevertheless, with global oil consumption rising at its fastest rate in 24 years, the amount of idle capacity is more likely to get smaller by the end of the year as the winter months tend to boost demand.

The International Energy Agency, the energy watchdog of the OECD, forecasts fourth-quarter demand this year to reach 82.9m barrels a day, up from the forecast of 80.8m b/d from the current quarter.

Energy traders have been asking - if the world is struggling now, what is going to happen by the end of year? It looks like global crude inventories will be tapped, even though these stockpiles are not as large as analysts had expected at the start of the year.

Jamal Qureshi, oil analyst at PFC Energy, said inventory increases were 1m b/d during the second quarter, which is traditionally the weakest period of the year for demand. This is well below forecasts at the start of the year of about 1.5m b/d.

"Demand has been a lot stronger than everybody had expected," said Mr Qureshi.

Even the high oil prices have had little effect in slowing demand.

While consumption has grown strongly and boosted energy prices and oil company earnings, supply has been a cause for concern. Production was one of the few negative areas from this week's deluge of corporate earnings in the energy sector. Royal Dutch/Shell Group recorded a fall in output, BP's production outside Russia fell, while ExxonMobil relied on higher output from Norway and west Africa to offset declines elsewhere to lift overall production.

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