February 23, 2005
Bloomberg

Oil prices may rise as high as $60 a barrel this year on concern that OPEC may not be able to fill the gap left by any oil supply disruptions, said Frederique Dubrion, a fund manager at Geneva-based Bearbull Securities.

"The fact that OPEC excess capacity is the lowest in three decades means if you see a big disruption, prices could go up,'' said Dubrion, who helps oversee the equivalent of about 65 million euros in energy company investments.

Saudi Arabia, the world's biggest oil exporter, is pumping less than its capacity, maintaining a cushion of 1.5 million to 2 million barrels a day in case of emergency, the country's oil minister, Ali al-Naimi, said Feb. 22. In September, when prices rose 13 percent, the Kingdom's spare capacity was 1.5 million.

World oil demand grew 3.4 percent last year, the fastest pace since 1976, allowing oil producers to pump near their limits and benefit from sales at record prices. Concern that spare capacity was inadequate helped send prices to a peak of $55.67 a barrel in New York on Oct. 25.

Crude oil traded above $51 a barrel in New York today, 31 cents below the highest price in almost four months, as colder- than-normal weather in the U.S. and Europe raised demand.

Crude oil for April delivery traded at $51.26, down 16 cents, or 0.3 percent, at 9.49 a.m. Singapore time in after-hours electronic trading on the New York Mercantile Exchange. Futures are up 49 percent from a year ago.

Traders who buy a single 1,000-barrel December crude oil futures contract at the current price of $49.10 would make $10,900, more than triple the exchange-required deposit, if oil spikes to $60 a barrel by the year-end.

Excess Capacity

Prices could rise "if we had a serious crisis in the Middle East, further terrorism in Saudi Arabia or Iraq, more troubles in Venezuela, Nigeria or political uncertainty in Russia or in any of the big producers,'' said Dubrion whose fund includes shares in Exxon Mobil Corp., Total SA and Suncor Energy Inc.

Saudi Arabia is grappling with militants who oppose the presence of Westerners in the birthplace of Islam. Militants killed more than 40 foreigners last year as they stepped up attacks in a bid to undermine the ruling al-Saud family.

OPEC's eleven members are expected to increase their collective production capacity to 31.5 million barrels a day by the middle of the year, 1 million barrels a day higher than last year, providing a bigger cushion for supply disruptions, the Paris-based International Energy Agency said on Feb. 10.

"Saudi Arabia is trying to reassure the market,'' Dubrion said. "Outside Saudi Arabia, you don't have a lot of countries who can increase production rapidly.''

Outperformed

Dubrion's Share Energy fund rose as much as 45 percent in the past year, outperforming the Morgan Stanley Capital International World Energy Sector index by about 7 percent. The fund is up 17.8 this year at the close on Feb. 22, making it the best performer in the company's 20 equity and fixed-income funds. Ethnic and labor unrest in Nigeria, Africa's largest crude oil producer, helped boost prices to a record last year and remain a threat to supply before the third-quarter gasoline demand season in the U.S., said Gal Luft, executive director of Washington- based Institute for the Analysis of Global Security.

"Nigeria could explode again and if that happens all bets are off,'' Luft said. "Prices in 2005 may average $43 to $45 a barrel with a couple of spikes towards the $50s and even $55.''

ChevronTexaco Corp. Chief Executive David O'Reilly said the U.S. should help end conflicts in West Africa that have disrupted production of low-sulfur crude-oil grades prized by refiners for making gasoline.

"Improving security and the investment climate in that region should be part of any energy policy,'' O'Reilly said this month at the Cambridge Energy Research Associates conference in Houston. West Africa was the source of 15 percent of U.S. crude- oil imports in November, according to the Energy Department.

To contact the reporter on this story:
Sri Jegarajah in Singapore at sjegarajah@bloomberg.net.

To contact the editor responsible for this story:
Reinie Booysen at rbooysen@bloomberg.net

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