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US oil prices break new records


London 2 June 2004 - US oil prices have hit a record $42 a barrel, following an attack by Islamic militants on a residential compound in Saudi Arabia which left 22 people dead. There is growing concern that al-Qaeda-inspired violence may now target the disruption of oil supplies from the world's biggest oil exporter. Recent attacks have focused on offices and housing compounds rather than on stopping the flow of oil. In London, Brent crude had surged $2.07 to $38.65 a barrel by 1530 GMT.

The latest price rises came as producers' cartel Opec geared up for a meeting on Thursday, at which it is expected to agree to raise output in an effort to ease high prices. "There is a near consensus on raising production," Qatari Energy Minister Abdullah Bin Hamad al-Attiya said, stressing that Opec would do "everything it can" to calm the market.

Escalation
Oil prices are already very high, thanks to factors including increasing demand, low stocks, Opec's price strategy and fears of supply disruptions. Analysts are concerned the attack could be the beginning of a series of assaults by militants to disrupt Saudi supplies. A statement purporting to be from al-Qaeda and claiming responsibility for the weekend violence said the attacks had been directed at "American companies... that are specialised in oil and steal the wealth of Muslims". "This is the worst escalation in terrorism in Saudi Arabia we've seen. It shows these guys are serious and will attack again," said independent London energy analyst Geoff Pyne.

"Even if they are not capable of doing serious damage to oil infrastructure, political instability and the threat to the ruling family is of real concern and promises to haunt the oil market for some time to come." Investec Securities analyst Bruce Evers said any disruption of Saudi production "would be critical not only to the Saudi economy but the global economy." "If they suddenly start to attack oil installations we are going to be in serious trouble. Obviously the oil installations are very heavily guarded but it does not mean that they won't try to attack them," he said.

Production promise
Two weeks ago, US oil prices peaked at $41.85, the highest level on record, although economists point out that prices were far higher in real terms - which takes inflation into account - during the oil shock of the late 1970s. Leading oil producing nations have attempted to reassure the markets, signalling that Opec will lift output.

Saudi Arabia has proposed that Opec members should raise output by up to 2.5 million barrels a day, and has unilaterally committed itself to pumping another 800,000 barrels a day. Opec is thought to be already breaching its official daily production ceiling of 23.5 million barrels by about 2 million barrels a day. But an Opec spokesman said three of the organisation's members - Saudi Arabia, Kuwait, and the United Arab Emirates - could between them add three million barrels a day "at short notice".

Economy worries
However, some analysts believe the time lag between agreeing a production boost and the extra oil reaching the marketplace would keep prices high for the time being, even if Opec did achieve a genuine increase in output. Leading non-Middle Eastern producers Russia, Nigeria and Mexico have also promised in recent weeks to boost output, but substantial production increases are thought to be unlikely in the short term because of technical constraints.

Oil exporting nations benefit in the short term from high oil prices, but prefer to avoid major price spikes as these dent economic growth in industrialised nations, leading to a drop in demand. Big price increases also encourage industrialised nations to invest in alternative sources of energy, which, if successful, could permanently cut oil consumption. Opec has an official price target of between $22 and $28 a barrel, although some members have recently called for this to be increased to offset a recent decline in the value of the dollar.

Oil prices could overshadow Tuesday's monthly summit of European Union finance ministers. According to the European Commission, a 25% jump in oil prices this year would reduce eurozone growth to less than 1.6% from an original forecast of 1.7%. It would also boost average inflation to 2% from an initial forecast of 1.8%.

ECIKS / BBC
 
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