To: Positive Futures 

Subject: CNN: World crude-oil output is close to its limit

~ This CNN report has:
   ".. the fastest growth in oil demand in 24 years. _World_crude-oil_output_is_close_to_its_limit_ with only top exporter Saudi Arabia holding any significant spare capacity.
    [Nigerian] Presidential Adviser on Petroleum Edmund Daukoru told Reuters that production was reduced 10 percent ...
    Uncertainty over supplies from Yukos, Russia's top exporter, also is supporting prices. Yukos last week trimmed deliveries to China.
    In Saudi Arabia, clashes between security forces and suspected al Qaeda followers served as a reminder of the threat to stability in the world's biggest producer."

{~ Below that is Reuters' report: "Why are oil prices so high?"}

    D.M.

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http://www.cnn.com/2004/BUSINESS/09/28/oil.price.50/
    is:

Oil hits high on Nigeria threat
Tuesday, September 28, 2004 Posted: 12:44 PM EDT (1644 GMT)

LONDON, England -- Oil prices have surged to historic levels as a threat of civil war in Nigeria adds to concerns over tight global supplies.

U.S. crude futures passed the key $50 a barrel level for the first since trading began 21 years ago on the New York Mercantile Exchange.

On Tuesday, oil touched a high of $50.47 a barrel in New York before easing to $49.95, up 31 cents on the day.

In London, Brent crude set a new peak at $46.80 a barrel and by 1530 GMT was trading at $46.30, up 37 cents.

Although prices hit new highs, after adjusting for inflation they are still below levels seen in the days of the first Gulf War in the early 1990s.

Tuesday's jump in oil comes as Nigerian rebels push for political reforms in the oil-rich African nation. They are vowing to start an "all-out war" against the government from the end of this week. (Full story)

The latest tension, combined with supply disruption from the impact of Hurricane Ivan in the Gulf of Mexico and instability in Iraq, Saudi Arabia and Russia, has pushed oil past a much-discussed psychological barrier.

"People seem to be focused on yet another layer of controversy," Peter Kemp, of Petroleum Intelligence Weekly in London, told CNN.

"There's no question we are in a tight global supply situation," he said. "We're in an adjustment period now."

David Thurtell, commodity strategist with the Commonwealth Bank in Australia, said the price was likely to go to $52 a barrel.

Oil rich but still poor

Nigeria is OPEC's fifth-largest producer, pumping 2.3 million barrels of oil a day. But despite its oil riches, about 70 percent of its people live in poverty.

Rebels battling the government of President Olusegun Obasanjo have warned oil companies to shut production by this Friday, October 1, and have told overseas workers to leave.

Royal Dutch/Shell has already closed one small well producing 30,000 barrels a day and has evacuated some staff as a security precaution.

On Tuesday, a Shell official said the group saw no reason to discontinue oil operations in Nigeria's delta. (Full story)

The rebels, who want political reforms, claim overseas oil companies are collaborating with the Nigerian government in acts of genocide.

'Knife's edge'

Concerns over Nigeria builds on worries about supplies from Russia, Saudi Arabia and Iraq.

Global supplies are straining to meet the fastest growth in oil demand in 24 years. World crude output is close to its limit with only top exporter Saudi Arabia holding any significant spare capacity.

Nigeria already has been forced to cut back output from surge capacity to protect its ageing facilities in the first sign that efforts by OPEC countries to quell prices by squeezing out extra output may not be sustainable.

Presidential Adviser on Petroleum Edmund Daukoru told Reuters that production was reduced 10 percent to base capacity of 2.25 million bpd in August. Nigeria had been pumping at surge capacity of up to 2.55 million bpd.

Uncertainty over supplies from Yukos, Russia's top exporter, also is supporting prices. Yukos last week trimmed deliveries to China.

In Saudi Arabia, clashes between security forces and suspected al Qaeda followers served as a reminder of the threat to stability in the world's biggest producer.

Iraqi pipelines have been the target of frequent sabotage attacks. But on Monday deliveries resumed at about 450,000 bpd through the main northern line to Turkey after engineers completed repairs from a bomb attack September 2. Southern exports were near full capacity at two million bpd.

OPEC president Purnomo Yusgiantoro said the cartel was supplying enough crude and was not to blame for high prices.

"This is because of Hurricane Ivan and some problems in other places," said Purnomo of high prices. "This is not a supply and demand problem. OPEC supply is enough," he told reporters in Jakarta.

When Ivan hit the United States earlier this month it damaged petroleum facilities, led to the evacuation of platforms and delayed oil shipments.

 -=# Box #=-
FACT BOX: NET OIL EXPORTERS
 - (millions of barrels per day, 2003)
1. Saudi Arabia 8.38
2. Russia 5.81
3. Norway 3.02
4. Iran 2.48
5. UAE 2.29
6. Venezuela 2.23
Source: U.S. Department of Energy June 2004
 -=#end Box #=-
Copyright 2004 CNN. All rights reserved.This material may not be published, broadcast, rewritten, or redistributed. Associated Press contributed to this report.
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http://www.cnn.com/2004/BUSINESS/09/28/oil.reasons.reut/index.html
    is:

Why are oil prices so high?}
Instability in Nigeria, the fifth largest OPEC producer, has pushed oil to $50 a barrel.
Tuesday, September 28, 2004 Posted: 5:25 AM EDT (0925 GMT)

LONDON, England (Reuters) -- Following are some of the factors behind oil's price surge.

 ** Rising demand

World oil demand is growing at the fastest pace in 24 years. China's economic expansion has fueled dramatic gains in fuel consumption, drawing in crude and refined products from all around the world.

Chinese crude imports are up 40 percent so far this year and show no sign of slowing despite government efforts to calm economic growth.

Chinese demand is forecast to keep rising next year as car ownership surges and power generation needs grow. The prospect of sustained growth has encouraged big-money speculative hedge funds to bet that high oil prices are here to stay.

Indian consumption is growing fast too. And solid growth in the U.S. economy, which devours a quarter or all world oil, is driving competition between Asia and the United States for supplies.

 ** Need for investment

Big oil reservoirs are becoming harder to find and more expensive to develop. Many of the oil provinces outside OPEC are mature, which means that finds are now smaller, need more costly technology to develop and fall faster from peak production.

In OPEC, which holds around two-thirds of the world's oil reserves, many of the bigger nations either do not allow foreign investment in oil, or have unattractive investment and legal terms.

This has slowed down production capacity growth in OPEC nations, meaning that most are already producing flat out to meet demand.

Oil companies have also been cautious on spending since the '97-'98 price crash slashed their share prices and triggered a spate of mergers. Many now see more value in buying back their own shares than plowing money into developing oil supplies.

They have focused on large-scale projects, which will give them good margins. Many new ventures are in remote areas, which demand expensive equipment and are more susceptible to delays.

Forecasts of non-OPEC supply growth, especially when the rebound in Russian production is stripped out, have consistently been overstated. Non-OPEC supply growth outside Russia before the price crash averaged more than one million bpd. Since then it has been negligible.

The increased cost of finding and developing non-OPEC oil has fueled speculators convictions that oil markets are a good long-term bet.

 ** Lack of spare supply

The OPEC producer cartel has pushed its production to the highest level in 25 years in an effort to keep prices under control. This has left little spare capacity outside top world exporter Saudi Arabia.

The strain on the world supply system has left it more vulnerable to supply disruptions and increased the likelihood of price spikes. This has attracted further buying interest from hedge funds betting that prices could go even higher.

At the same time, the oil industry's stock cushion against sudden supply disruptions has eroded. Oil companies have sought to become more efficient and free up capital by holding lower stocks. A wave of mergers following 1998-1999's price crash also reduced the number of companies holding inventory.

Commercial crude inventories in the United States have fallen for the last eight weeks, in part due to disruption to oil operations from the spate of storms in the U.S. Gulf.

The inventory drawdown has fueled concern that refiners may struggle to build supplies of distillate fuel, including heating oil, for peak winter demand.

OPEC, which controls around half the world's exports, has in recent years worked hard to stop stocks building, especially in the United States, during periods of seasonally weak demand.

Ministers have announced plans to cut production before prices start to weaken, helping to create the conditions for a sustained price backwardation, pricing physical oil at a premium to future supplies.

This pricing structure gives refiners no chance to replenish stocks with lower-priced crude or products and forces them to buy at the last minute.

 ** Political tensions in oil-producing nations

Political tensions in the Middle East and violence in Iraq have undermined traders' confidence in security of supply from the region, which pumps a third of the world's oil.

Iraqi exports have been repeatedly hit by sabotage attacks, keeping its supplies below pre-war volumes.

Traders fear Islamic militants could target oil infrastructure in OPEC's biggest producer Saudi Arabia. May's deadly attacks on foreign oil workers in the Saudi oil city of Khobar fostered fears of a larger attack on the kingdom's tightly-protected oil facilities.

Russian oil giant Yukos, which produces around 20 percent has repeatedly warned that it could be forced to cut production as the government pursues payment of multibillion dollar tax arrears. It has already trimmed exports to China.

Civil unrest in OPEC member Nigeria is another flashpoint. Rebels in the country's oil-rich Niger delta have threatened to attack oil facilities unless the military halts an offensive. Oil production in Venezuela, a big supplier to the United States, is still suffering the fall-out of the strike 18 months ago that cut capacity.

And concern is emerging over tensions between the United Nations and Iran over nuclear inspections. High oil prices could strengthen Iran's bargaining position if the issue comes to a head in coming months.

Supply security concerns have spurred many countries to increase strategic inventories, withdrawing supply from an already tight market.

The United States continues to fill its strategic petroleum reserve despite high prices. Other countries including India, South Korea, Taiwan and China are building reserves or plan to start soon.

The post-September 11 chill in relations between Saudi Arabia and the United States has raised concerns that Riyadh may no longer be willing to act as a guarantor of cheap oil as it did during the 1990s.

 ** Refinery bottlenecks

Environmental regulations are pushing up the price of making fuel, forcing companies to build expensive new facilities and making it harder to ship supplies between regions.

U.S. gasoline demand is up in part because of the growing numbers of low-mileage-per-gallon sports utility vehicles on America's highways. The United States accounts for about 45 percent of world gasoline consumption.

U.S. gasoline demand drives a growing requirement for high-quality light, low-sulphur crude. China is competing for those grades of oil to meet demand for transportation fuels, lifting the price premium for low sulfur crude. Most of OPEC's crude is heavy and high-sulphur.

In the United States, individual states demand an array of different gasoline blends. This makes it harder to transport supplies between states and to import supplies from abroad.

Environmental regulations have made it more expensive to build new refineries, and much harder to get the necessary permits.


Copyright 2004 Reuters. All rights reserved. This material may not be published, broadcast, rewritten, or redistributed.
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