Oil Hits $100 a Barrel on Global Political Tension and Supply Concerns

By Jason Simpkins
Associate Editor

After flirting with the century mark for months, crude oil finally it the record $100 a barrel level yesterday (Wednesday), fueled by violence in Nigeria, bad weather in Mexico and an unprecedented admission by the Middle East oil cartel that petroleum supplies will fall short of demand by 2024.

An anticipated interest-rate cut by the U.S. Federal Reserve later this month only exacerbated matters, because of growing worries that lower rates and an associated weaker greenback will stoke inflationary pressures.

Bands of armed rebels invaded Port Harcourt, the center of Nigeria's oil industry. The city's unrest was the focus of worldwide attention just months ago when a 3-year-old British girl - the daughter of an oil contractor from Co Durham - was kidnapped. She was eventually released unharmed.

Several other oil workers have been abducted as a result of hostilities between rebel groups [notably The Movement for the Emancipation of the Niger Delta] and the Nigerian government. The rebel groups assert that the country's oil money isn't going to those who most need it, causing them to lash out against the industry as a whole. Prior to the recent abduction, a Royal Dutch Shell PLC (RDS.A, RDS.B) oil rig was attacked.

Nigeria was the world's eighth-largest oil exporter in 2006, producing 2.1 million barrels a day, according to the Energy Information Agency. However, the country's oil production has fallen off considerably over the past two years because of the attacks.

"Although the Nigerian violence has not impacted oil flow out of the country, it has reignited supply concerns as militant attacks have reduced Nigeria's crude output by roughly 20% since 2006," John Geres, of SunTrust Robinson Humphrey (STI), said in a research note obtained by the Associated Press.

Meanwhile, the AP also reported that the world's 10th-largest exporter of crude, Mexico, was forced to close several ports because of inclement weather.  According to CNNMoney.com, word has spread amongst traders that Mexico plans to temporarily halt exports.

In addition to sporadic disruptions in productivity, concerns that supply will be unable to keep pace with increased demand from China and India resurfaced as well.  The December issue of the OPEC Review, published by the Organization of Petroleum Exporting Countries' Vienna-based Secretariat, outlined three scenarios in which the cartel could fail to meet its demand responsibilities. Those scenarios culminate in the years of 2024, 2037, and 2048 - depending on how quickly its members ramp up output.

The report also said that - in coming years - supplies from Kuwait will be inconsistent, and to a large degree, unstable. It was equally skeptical of Saudi Arabia's assertion that it is capable of meeting world oil demand for the next 50 years.

Investor speculation has also helped to fuel concerns about supply. Many investors believe there was a drop in crude inventories of 1.8 million barrels last week. That would make for the seventh straight weekly decline.

"(A decline) is not anything unusual for this time of year, but when it happens for seven weeks in a row, it starts to add up," Amanda Kurzendoerfer, of Summit Energy Services Inc., told the AP

Investors also have an eye on recent economic indicators, which suggest that tepid consumer spending and ongoing credit-market woes will induce Federal Reserve policymakers and Chairman Ben S. Bernanke to once again reduce a benchmark interest rate when they meet at the end of this month. That rate cut will weaken the U.S. dollar, which in turn will push the price of dollar-denominated oil even higher.

At their last meeting, Fed officials said economic growth for the New Year would be less than forecast. Recent reports are already bearing this out. As a result, many investors are turning to such commodities as gold and oil, rather than putting their money at risk in stocks and bonds.

Light, sweet crude for January delivery rose $4.02 a barrel to reach the psychologically important $100 a barrel level on the New York Mercantile Exchange (NMX) yesterday, before dropping below $99.50. The previous record of $99.29 was established Nov. 20.

Oil prices gained nearly 60% in 2007, and have risen five-fold since 2002.

[Editor's Note: Uranium is just one of the commodities investors should look at in 2008. With the huge global demand for commodities of all types that China's frenetic growth is generating, and the inflationary pressures being spawned by the falling U.S. dollar, investment gurus such as "adventure-capitalist" Jim Rogers say that commodities are a good place to be in 2008. Rogers chronicles specific investment opportunities in both commodities and the shares of specific China-based companies in his just-released bestseller, "A Bull in China: Investing Profitably in the World's Greatest Market." To see how Money Morning can help you can obtain a free copy of Rogers' new book, please click here.]

News and Related Story Links: