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Oil hits new record above $118 a barrel

Oil rises to a record high above $118, boosted by a jump in oil demand last month from China, and worries about supply from key producers Russia and Nigeria.

business Updated: Apr 22, 2008 16:43 IST
Jane Merriman

Oil rose to a record high above $118 on Tuesday, boosted by a jump in oil demand last month from China, the world's second biggest energy consumer, and worries about supply from key producers Russia and Nigeria.

US light crude for May delivery was up 26 cents at $117.74 a barrel by 1005 GMT, after an all-time peak of $118.05.

London Brent crude was up 27 cents at $114.70 a barrel, after a record peak of $115.03.

Oil has hit a string of record peaks this month, driven by booming demand from emerging markets such as China that has coincided with long-term supply constraints.

A weak US dollar has also played a part in boosting the price of dollar-denominated commodities like oil and also attracted speculative inflows from hedge funds.

"Every time the market does make new highs, it suggests that the upward trend is still intact and that provides a catalyst for the funds to keep buying it," said Tony Machacek of Bache Commodities Ltd.

China's oil demand leapt 8 per cent in March from a year ago, the fastest rate in 19 months as refiners boosted imports ahead of the Olympics.

But the high cost of producing more oil plus political constraints on new supplies mean the market looks set to struggle to keep pace with growing emerging market demand.

"The news that Russia, the largest non-OPEC producer, will produce less this year than the year before and Nigeria's output may be set to fall because of lack of investment makes people realise high prices are justified," said Bob Greer, executive vice president at commodity fund manager PIMCO.

"The 5 year forward contract has gone above $100," he said, referring to a surge in long-dated oil prices that could point to a sustained period of high prices.

Supply disruptions
Against this backdrop, the market is sensitive to any events that could threaten supply.

Pipeline attacks in OPEC member Nigeria last week shut 169,000 barrels per day (bpd) of Bonny Light production, forcing Royal Dutch Shell Plc to declare force majeure on crude oil exports.

Nigerian rebels also attacked two Shell oil pipelines in the Niger Delta on Monday.

An oil refinery at Grangemouth in Scotland has begun shutting down ahead of a two-day strike due to start on Sunday. Some North Sea oil and natural gas output will have to be shut in if the strike halts the refinery.

The Organization of the Petroleum Exporting Countries has insisted the market has enough oil and refused to pump more crude despite calls for more oil from consumer nations.

A lack of spare global output capacity means very little can be done to tame record high oil prices, Shokri Ghanem, head of Libya's National Oil Corporation said.

"Prices will have to stay high in the long term to encourage exploration and production," he said, speaking on the sidelines of the International Energy Forum in Rome.