A Price Inflamed By Fear

Hezbollah attacks on Israel are being watched by anxious oil traders as well as governments. (By Michael Robinson-chavez -- The Washington Post)

In the physical world of oil, experts said that if anything, the supply balance was better than it was a couple of years ago, when prices were much lower. A new pipeline was formally opened yesterday, carrying oil from Azerbaijan through Georgia to the port of Ceyhan in Turkey. The pipeline will carry 430,000 barrels a day and is expected to move up to 1 million barrels a day by the end of next year.

On Wednesday, the International Energy Agency issued a monthly report forecasting adequate crude oil supplies, with new non-OPEC production coming on stream later this year and sharply higher OPEC capacity by the end of 2007. The IEA also slightly shaved its estimate for 2006 demand growth. It has trimmed the estimate by 820,000 barrels a day since first making a 2006 estimate a year ago, noted John Herrlin, an oil analyst at Merrill Lynch & Co.

Meanwhile a European oil industry source said that the Nigerian newspaper report, which said that explosions had cut off 120,000 barrels a day of oil supplies, was overstated. The source, who spoke on condition of anonymity to protect business relationships, said that the explosions had cut off only 50,000 barrels a day and that the production venture, run by the Italian state oil company, Eni SpA, would restore output within a couple of days.

But with excess oil production capacity much lower than it was a few years ago, markets remained sensitive to any future risks. Sieminski said that would explain why companies were keeping higher inventories than they did a year ago.

"When this kind of thing happens," Edward Morse of Hess Energy Trading Co. said of the price run-up in the past week, "it's political risk and nothing more than that. The issue is really Iran."

Crude oil prices have bounced up and down for the past two weeks depending on the latest statement from Iranian officials. On Tuesday, oil rose for the first time in four trading sessions after President Mahmoud Ahmadinejad said his nation would not back down "one iota" over its right to conduct nuclear research.

With Western nations turning to the U.N. Security Council for possible sanctions to stop Iran from continuing its nuclear research program, Morse said oil traders were looking for evidence that Iran might be using its leverage to exert pressure back. "Is Iran going to use an oil weapon? Almost certainly not. But where might Iranians put pressure?" he asked. Most likely through proxies, Morse said. For example, Iran could pressure the United States by using allies in southern Iraq or its Hezbollah allies in Lebanon, and that might explain Hezbollah's foray into Israel this week.

Separately, the possibility of a hurricane in the Gulf of Mexico still hangs over oil markets. In an interview yesterday, Brian M. Storms, chief executive of insurance broker Marsh Inc., said that worldwide hull insurance rates have gone up and that rates have gone up sharply for offshore oil platforms and rigs. A company spokesman said later that oil facilities in the Gulf of Mexico had undergone "severe and punitive" insurance rate increases, averaging about 150 percent but in some cases reaching 400 percent since Hurricane Katrina.

Investor interest in oil markets continues to run high as more endowments, pension funds and other institutions allocate portions of their portfolios to commodity funds. One indicator of such interest: On July 1 Lehman Brothers launched a new commodity index that was 56.2 percent based on energy prices.

Though oil prices set a record for the New York Mercantile Exchange, which stared trading oil in 1983, they still didn't match the all-time inflation-adjusted peak. A quarter-century ago, after the Iranian revolution and the outbreak of the Iran-Iraq war, the price of crude oil climbed over $90 a barrel when expressed in today's dollars.