The surge this week is being fueled by the threat of a Turkish military incursion in northern Iraq. The renewed tensions in the highly volatile region raised new concerns about further instability in the oil-rich Middle East. Iraq is the third-largest holder of known oil reserves, after Saudi Arabia and Iran. Turkey is a major passage for oil exports from Iraq and the Caspian Sea.
"Markets hate uncertainty," said Lawrence Goldstein, an economist at the Energy Policy Research Foundation. "The fundamentals are very supportive of high oil prices. But the majority of the latest run-up has nothing to do with the fundamentals of the markets but has to do with fear."
Despite the rally of the past week, the Organization of Petroleum Exporting Countries ruled out an emergency release of oil supplies. At its last meeting in Vienna, in September, the oil cartel agreed to a modest increase of 500,000 barrels a day in supplies.
The secretary general of OPEC, Abdalla Salem El-Badri, said in an e-mail message Tuesday that the cartel was concerned with rising prices. But he pointedly added, "There has been no interruption in crude supplies."
"While the Organization does not favor oil prices at this level, it strongly believes that fundamentals are not supporting current high prices and that the market is very well supplied," El-Badri wrote. "The rising oil prices which we are currently witnessing are, however, largely being driven by market speculators."
Crude oil for November delivery touched $88.20 a barrel on the New York Mercantile Exchange during midday trading after jumping nearly 3 percent Monday to $86.13. In late trading, oil retreated somewhat, to $87.78, up $1.65.
Oil futures, which have gained $9 in the past six trading sessions, are up more than 43 percent this year.
On an inflation-adjusted basis, oil is close to the record highs reached in the early 1980s when an energy crisis and the Iranian revolution pushed the price to about $100 in current money.
On Monday, the Turkish cabinet asked Parliament for permission to attack Kurdish separatists in northern Iraq. Analysts noted that since the U.S. invasion of Iraq in 2003, oil exports from the northern part of the country through Turkey have been sporadic because of frequent bombings of the main pipeline in the area.
But as oil producers are straining to meet the global growth in oil demand, commodity traders are focused on anything that might affect energy supplies.
Investors, commodity index funds, and other hedge funds have recently returned to the energy sector, analysts said, increasing investments in oil and other commodities and contributing to the rising prices.
Also, many investors are buying into oil to hedge against the decline in the value of the dollar. Since the beginning of the year, the dollar has declined nearly 8 percent against the euro. The euro recently traded close to its record high of more than $1.42.
Commodity markets also seem to have discounted the risks of a recession in the United States, the world's biggest oil market, after the U.S. Federal Reserve cut interest rates last month. A slowdown in the United States would reduce global oil demand, and depress prices.
Despite the high prices, global oil consumption is rising, especially in China and the Middle East.
But not everyone is convinced that demand will grow as strongly as was suggested by the International Energy Agency, an energy adviser to industrialized countries. In a monthly report released last week, the energy agency said it expected global demand to jump by 2.4 percent next year, to 88 million barrels a day.
Some analysts said this figure was unrealistically high given the slowdown in global growth. Oil demand is expected to grow by 1.5 percent to 85.9 million barrels a day in 2007.
"There is a perception that fundamentals are more bullish than they actually are," said Roger Diwan of PFC Energy, an oil consultancy. He called the forecast by the energy agency "unrealistic."
Via: IHT by Jad Mouawad
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