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Tom Nicholls: The only way is up

Oil futures could soon be changing hands at $100 and over Oil prices are set to top $100 as speculators continue to drive prices higher, say analysts and industry figures. Daniel Yergin is the latest energy expert to warn that oil prices could exceed $100 a barrel. Chairman of Cambridge Energy Research Associates, a consultancy, Yergin claims prices are being defined less and less by objective assessments of supply and demand and increasingly by concerns about possible supply disruptions.

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These could be trading at $100 or over quite soon

“What we’re seeing in the oil market today is rooted more in the cauldrons of geopolitics and the impact of financial markets, expectations, and psychology, than in supply and demand,” he told a conference on Russian energy in Washington this week: tougher rhetoric over Iran’s nuclear programme and heightened tension between Turkey and Iraq are taking their toll on market sentiment. Oil, he claims, may be “only one or two events away from $100-plus oil”. A weakening dollar is not helping stem the slide. An economic slow-down would, of course, make a difference – undermining oil demand and taking the heat out of the oil market. But that won’t happen in time to offset the bullish effects of present political developments in the Middle East. Yergin is not alone. Clarence Cazalot, chief executive of Marathon Oil, a US oil company, made similar comments this week, blaming recent oil-price inflation on speculators. Cazalot believes that $100 oil would not be justified in terms of supply and demand fundamentals, suggesting a $55-60 a barrel is a more reasonable level. Last week, Peter Voser, Royal Dutch Shell’s chief financial officer, was quoted as saying that oil prices were being driven by speculation and political tension, as opposed to supply shortages. But even though the fundamentals may not warrant it, many analysts – including Kevin Norrish of Barclays Capital — fear oil futures may have built up unstoppable momentum in the drive towards $100. Stephen Schork, publisher of the industry newsletter the Schork Report, has agreed that $100 now looks realistic. In any case, prices are only a few dollars off the ton. This week, US light crude futures reached a nominal all-time high of $93.20 a barrel because of renewed geopolitical tension over Iran’s nuclear programme, weakness in the US dollar and news of a big production shut-in in Mexico. Adjusting for inflation, oil prices are now at their highest level since the early 1980s, albeit still shy of the equivalent of about $100-$110 a barrel in today’s money reached in late 1979 after the Iranian revolution. One way to cool prices down would be to increase supply and Opec officials have indicated that the organisation will use its spare capacity of 3.5 million barrels a day if the market needs it. But Opec — whose supply increase of 0.5 million barrels a day from 1 November has not had the desired effect on prices — does not believe that more crude oil is the solution. It continues to blame price rises on speculators, refinery bottlenecks, seasonal maintenance work and geopolitics. That, though, is a self-interested spin on the situation, some commentators suggest. The Centre for Global Energy Studies (CGES) says the cartel could ease prices by increasing oil supply and offering refiners bigger discounts on its heavy crudes. Opec, argues CGES, seems prepared to blame high oil prices on “almost everything except its own output policy”.