Just two weeks ago the oil market shrugged off Russia's invasion of Georgia, but crude spiked more than $5 Thursday, at least partly in response to Russian complaints about a planned missile base in Eastern Europe.
But a bigger factor in determining the direction of oil prices may be whether the Organization of the Petroleum Exporting Countries cuts output at its September meeting to curb crude's slide in recent weeks.
Amy Myers Jaffe, an energy fellow at Rice University's James A. Baker III Institute for Public Policy, called Thursday's movement "irrational" if the market is reacting solely to tensions with Russia.
Crude for October delivery closed up $5.62, or nearly 5 percent, at $121.18 on the New York Mercantile Exchange — its first movement over $120 since Aug. 8.
Jaffe said crude's decline since reaching a high of $145.29 on July 3 prompted some analysts to speculate that prices would fall back into double digits.
"The question becomes, what number would OPEC defend?" she said.
"It's not so much that people think the Russians will cut anybody off. It's more that the market was in a slide, and there were questions of whether we'd pierce the $100 psychological level. We were creeping toward it," Jaffe said.
In its August monthly oil report, OPEC noted that in recent weeks, oil prices have reflected weakening economic growth in the U.S., Europe and Japan, as well as lower U.S. gasoline demand.
The Energy Department's Energy Information Administration also said this week that the market's focus had shifted to the sharp decline in U.S. oil consumption instead of thirst for oil in emerging economies in the Middle East and Asia.
OPEC said it has pumped 780,000 more barrels a day since April, reaching 32.6 million barrels a day. U.S. crude stockpiles rose by 9.4 million barrels to 305.9 million barrels last week, more than analysts expected.
"With current OPEC production well above the expected demand for OPEC crude, there is potential for a sharp build in crude oil inventories," the OPEC report said, while geopolitics and potential for hurricanes in the Gulf of Mexico remain as upside risks.
"In light of these ongoing changes in the market, OPEC will continue to closely monitor market developments ahead of the upcoming ministerial meeting in September."
Barclays Capital said in a report on Thursday that the flow of information reaching OPEC ministers "is now such that only a price rally back to well above $120 a barrel is likely to be able to halt a substantial removal of OPEC crude output from the market."
"Should prices move back up into the $120s and look steady, then a cut is less likely," Barclays said.
Other analysts gave tensions with Russia more weight.
"The Russia/Georgia situation remains unresolved and is contributing to increased bellicosity between Russia and NATO as well as Russia and the U.S.," Ritterbusch and Associates of Galena, Ill., said in a note to investors Thursday.
"Russia is well aware that its intransigence is contributing to another run-up in oil prices, certainly a favorable development as far as their economy is concerned," Ritterbusch said.
Adding to the international heat is Russia's displeasure about a U.S. agreement with Poland to build a missile base there.
The oil markets may be reflecting worries that the disputes could disrupt pipelines serving Europe.
Gene McGillian, an analyst with Tradition Energy in Stamford, Conn., attributed some of the price rise to "technical" buying, driven by traders' evaluation of previous pricing patterns rather than by fundamentals.
"But we don't want to downplay the threat of Russia using all its oil and gas supply as an economic tool to en- force events," McGillian said. "Whether that will occur is still far out into the future. Today showed the market might be vulnerable to ramifications of that kind of thing."
But a bigger factor in determining the direction of oil prices may be whether the Organization of the Petroleum Exporting Countries cuts output at its September meeting to curb crude's slide in recent weeks.
Amy Myers Jaffe, an energy fellow at Rice University's James A. Baker III Institute for Public Policy, called Thursday's movement "irrational" if the market is reacting solely to tensions with Russia.
Crude for October delivery closed up $5.62, or nearly 5 percent, at $121.18 on the New York Mercantile Exchange — its first movement over $120 since Aug. 8.
Jaffe said crude's decline since reaching a high of $145.29 on July 3 prompted some analysts to speculate that prices would fall back into double digits.
"The question becomes, what number would OPEC defend?" she said.
"It's not so much that people think the Russians will cut anybody off. It's more that the market was in a slide, and there were questions of whether we'd pierce the $100 psychological level. We were creeping toward it," Jaffe said.
In its August monthly oil report, OPEC noted that in recent weeks, oil prices have reflected weakening economic growth in the U.S., Europe and Japan, as well as lower U.S. gasoline demand.
The Energy Department's Energy Information Administration also said this week that the market's focus had shifted to the sharp decline in U.S. oil consumption instead of thirst for oil in emerging economies in the Middle East and Asia.
OPEC said it has pumped 780,000 more barrels a day since April, reaching 32.6 million barrels a day. U.S. crude stockpiles rose by 9.4 million barrels to 305.9 million barrels last week, more than analysts expected.
"With current OPEC production well above the expected demand for OPEC crude, there is potential for a sharp build in crude oil inventories," the OPEC report said, while geopolitics and potential for hurricanes in the Gulf of Mexico remain as upside risks.
"In light of these ongoing changes in the market, OPEC will continue to closely monitor market developments ahead of the upcoming ministerial meeting in September."
Barclays Capital said in a report on Thursday that the flow of information reaching OPEC ministers "is now such that only a price rally back to well above $120 a barrel is likely to be able to halt a substantial removal of OPEC crude output from the market."
"Should prices move back up into the $120s and look steady, then a cut is less likely," Barclays said.
Other analysts gave tensions with Russia more weight.
"The Russia/Georgia situation remains unresolved and is contributing to increased bellicosity between Russia and NATO as well as Russia and the U.S.," Ritterbusch and Associates of Galena, Ill., said in a note to investors Thursday.
"Russia is well aware that its intransigence is contributing to another run-up in oil prices, certainly a favorable development as far as their economy is concerned," Ritterbusch said.
Adding to the international heat is Russia's displeasure about a U.S. agreement with Poland to build a missile base there.
The oil markets may be reflecting worries that the disputes could disrupt pipelines serving Europe.
Gene McGillian, an analyst with Tradition Energy in Stamford, Conn., attributed some of the price rise to "technical" buying, driven by traders' evaluation of previous pricing patterns rather than by fundamentals.
"But we don't want to downplay the threat of Russia using all its oil and gas supply as an economic tool to en- force events," McGillian said. "Whether that will occur is still far out into the future. Today showed the market might be vulnerable to ramifications of that kind of thing."
Source: Houston Chronicle|By KRISTEN HAYS
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