Oil prices reach $140

Oil prices are breaking record every month since the beginning of the year. Today they reached an unprecendented level of $142 at the New York Mercantile Exchange.

This occurs only seven weeks after oil prices reached $130. This phenomenom is most likely to continue as some forecasts infer that prices may reach $170 this summer.

The Financial Times propose us once again an interesting insight of this event by giving us the reasons and data behind such a continuous increase.

According to the Financial Times :

Oil prices extended their record breaking run on Friday after pushing above the $140 a barrel level for the first time in the previous session, driven higher by a cocktail of supply concerns, dollar weakness, inflation fears and turmoil in equity markets.

Nymex August West Texas Intermediate hit a hit a record $142.26 a barrel before easing back to trade $2 higher at $141.64. ICE August Brent hit a record $141.98 a barrel before easing back to trade $1.67 higher at $141.50.

Oil prices rose by more than $5 a barrel on Thursday after Libya threatened to cut its oil production and Opec’s president warned that prices could surge as high as $170 a barrel this summer.

Shokri Ghanem, Libya’s top oil official, said the country was considering reducing oil production in response to a bill before the US Congress that would empower Washington to sue Opec members for cutting supplies.

“We are studying all the options,” Mr Ghanem told Reuters. “There are threats from the Congress and they are taking Opec to court, extending the jurisdiction of the US outside the US,” he said.

Earlier, Chakib Khelil, president of Opec, said oil prices could rise as high as $170 a barrel before easing back by the end of the year.

Traders took the warnings as a green light for buying with further encouragement for buying interest provided by dollar weakness and weakness in equity markets.

In late April, Mr Khelil warned that oil prices could reach $200 a barrel this year, but since then Saudi Arabia has promised to increase supplies to 9.7m barrels a day, the highest level in almost 30 years. At a conference last weekend, the kingdom said it planned to raise crude production capacity to 12.5m barrels a day by 2012 from 9.8m b/d currently.

“It is unlikely that global markets will see this additional crude in a hurry,” said Kona Haque, commodity strategist at Macquarie. “This is either because Saudi won’t be able to, due to delays and soaring project [cost] inflation, or won’t be willing to, due to the need to maintain reserves for future generations.”

Macquarie said that over the next five years, oil prices were likely to test the $200 a barrel level and were unlikely to sink below $100.

Adam Sieminski of Deutsche Bank said there was a tug of war in oil markets based on two distinct views of how the marginal price of crude was set.

One view was that “marginal cost of supply” should dominate and this might be near $75 to $100 a barrel. The other view was that prices were rising toward the level required to destroy demand, or to get it to slow dramatically, probably above $150 a barrel.

Mr Sieminski noted that oil producers were becoming more accustomed to higher prices and Deutsche Bank’s review of the extremes in oil valuations suggested that prices might have to remain at elevated levels to curb demand growth

“The oil market is in a state of confusion unable to believe that the forces that have driven prices higher over the past year, (namely Opec production cuts, non-OPEC supply problems, strong economic growth in emerging markets and a falling US dollar) may be moving in reverse or at least not moving in the direction of even higher oil prices,” said Mr Sieminski.

Those prices are already having large impacts on our daily lives worldwide and I will propose you very soon a selection of the consequences. So for this and for much more, stay tuned !