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Why are oil prices so high?

The reasons why crude oil prices are hovering near $70 a barrel.

india Updated: Apr 13, 2006 12:22 IST

Reasons for the soaring prices:

Worries about supply disruption in major OPEC producers are the most striking reasons for high oil prices of nearly $70 a barrel.

Buying gathered momentum after rebel attacks in Nigeria forced the closure of around 500,000 barrels per day (bpd) of high quality oil, favoured by refiners for making gasoline.

Fears of supply disruption from Iran, which like Nigeria is an OPEC member IRAQ IS struggling to get its oil industry back on its feet. Exports have stagnated at around 1.3 million bpd, compared with around 1.7 million bpd under Saddam Hussein.

OPEC’s spare capacity has been squeezed to around two million bpd.

Adding to concerns about tight supplies of unrefined crude is a global shortage of refining capacity, exacerbated by new fuel regulations in the United States.

Traders worry that refineries will not be able to produce enough gasoline of the right quality for this year’s peak US summer driving season, beginning in May.

Meteorologists are warning there could be another heavy hurricane season this summer.

Refining capacity is already tight after years of under investment and after the US industry took a battering in last year’s hurricane season.

The current four-year rally has been sustained because it has been driven by demand, notably from China.

Demand growth has slowed but is still rising and price strength has so far had a very limited effect on economies.

The world is coping well with high nominal prices, because in real terms, adjusted for exchange rates and inflation, they are lower than during previous price spikes and the world has become less energy intensive.

Strong commodity markets have attracted institutional and retail investors, who tend to buy for the long term.

But they say the $70-a-barrel mark is the level at which even oil market bulls begin to worry about the impact on growth and the possibility that demand will be destroyed.

First Published: Apr 13, 2006 12:22 IST