31 August 2005

The Web

Euro strong as analysts fear USD80 crude oil

Crude oil rose for a second day in New York, after breaching the USD70 a barrel threshold on Monday as Hurricane Katrina forced companies to evacuate platforms in the Gulf of Mexico, where 30 percent of US oil is produced.
Prices retreated to close slightly above USD67 after it appeared that Katrina's effects, while devastating, wasn't the feared knockout.
US President George W. Bush also was expected to tap into the nation's emergency petroleum stockpiles to help refineries affected by the storm.
The US government's supply – nearly 700 million barrels of oil stored in underground salt caverns along the Texas and Louisiana Gulf Coast – was established to cushion oil markets during energy disruptions.
The hurricane hit east of New Orleans, sparing a direct blow to one of the busiest seaports in the world. But barges and railroads heading to or from New Orleans and Mississippi ports such as Pascagoula and Gulfport ground to a halt.
The storm shut 92 percent of US Gulf output, closing the Louisiana Offshore Oil Port, the country's biggest import terminal. Investors are concerned Katrina will disrupt output for weeks.
Saudi Arabia on Monday said it was prepared to increase oil production to make up for supply losses caused by Hurricane Katrina. Some analysts are now predicting that prices could aim for the once unthinkable USD80 a barrel – a level economists fear could severely dent consumer demand and curb business activities.
Lasting damage to vital US oil and refining assets would further strain an industry that has struggled to keep up with two years of rapidly rising oil demand. The US Coast Guard said it had received early reports of oil platforms adrift in the gulf. Shell Oil said two of its drilling rigs under contract had drifted off location following the storm.
USD60 is a lot to pay for a barrel of oil, now that it costs twice as much it did in 2001. The most obvious effect is the price of petrol – and that most directly affects people with cars. The impact on American car owners is likely to be greater than on European drivers, because tax makes up a smaller proportion of the overall price at the pump in the US than it does in Europe. But even those who don't have a car will feel the impact. Rising oil prices lead to higher business costs, reducing profitability. Many businesses, such as airlines, will seek to pass this on to the consumer, cutting into household income.
Some companies have managed to defend themselves from rising prices by complicated hedging strategies. These involve agreeing a set price for future oil supplies over a fixed period of time – in other words, allowing them to lock in lower prices.
Smaller companies are often not able to take advantage of such sophisticated commodity market strategies, and have no option but to suffer the consequences.
Lower profits can lead to job cuts, hitting consumer demand just as higher prices do the same. And ultimately, lower consumer demand hurts company profitability.
On the other hand, oil companies such as BP and Shell have enjoyed booming profits, largely helped by the rise in the price of oil.
But as prices rise, consumers turn cautious and profits fall, the countries’ exports decline and trade deficits rise. A sustained rise in prices could lead to aggressive wage demands, again pushing inflation higher.
The International Monetary Fund (IMF) has suggested that a permanent USD15 a barrel oil price hike would reduce the level of GDP by 0.6% in the first year.
However the strength of the euro against the dollar have to some extent softened the impact of higher oil prices on the European economy. Countries who have become more energy efficient have even reduced their reliance on oil.
In Vienna, the Opec could discuss raising production quotas in order to fight record-high prices for crude when it meets in September in Vienna, a spokesman said. Increasing the ceiling has not been ruled out but no decision has been made.
Oil jumped as much as USD4.67, or 7.1 per cent in early electronic trading yesterday, the biggest increase in 29 months, before retreating on speculation that supplies are sufficient to make up for lost Gulf output. Natural gas, heating oil and gasoline climbed to records.
Last year, oil prices rose 22 percent in the month after Hurricane Ivan damaged oil rigs, ripped up undersea pipelines and blocked with silt the ports oil companies use to supply and maintain facilities in the Gulf. Hurricane Ivan last September wiped out a total of around 45m barrels of US oil output over six months.
European stock markets however closed higher on Monday, recovering from opening lows despite new record-high oil prices and concerns about the cost of Hurricane Katrina to the US economy.
The CAC-40 index in Paris rose 0.43 per cent to 4,812.18 points, rallying from a five-day stretch of losses. In Frankfurt the DAX-30 gained by 0.59pc at 4,812.18 points. The London stock exchange was closed for a bank holiday. The Euro Stoxx-50 index of leading Euro-zone shares added 0.49pc at 3,239.96 points.
The euro stood at $1.2253.

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