FACTBOX: Why oil prices are at a record high

Wed Aug 1, 2007 11:20am EDT

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(Reuters) - Crude oil hit a record high of $78.77 a barrel on Wednesday after a larger-than-expected drop in crude inventories in the United States, the world's top fuel consumer.

Real and threatened disruptions to crude oil supplies, constraints at refineries in consuming countries, resilient global fuel demand and a flow of investor money into oil and other commodities have pushed prices higher.

FUNDS

Investment flows from pension and hedge funds into commodities including oil have resumed in recent months after a hiatus earlier in the year due to concerns about how the global economy was moving.

Speculative trading in energy markets has boomed in recent years as investors sought to beat returns in other markets such as equities and bonds.

But in the week to July 24, speculators in the New York Mercantile Exchange crude oil market cut net long positions in a bet prices would go down, according to the Commodity Futures Trading Commission.

Net crude longs were cut to 108,782 from a record 112,287 in the week to July 10.

LESS OPEC OIL

The Organization of the Petroleum Exporting Countries, source of more than a third of the world's oil, is pumping less than in 2006 after deciding to remove barrels from the market.

OPEC agreed to curb supply by 1.7 million barrels per day, or about 6 percent, last year in two steps. The second stage took effect from February 1.

Members have made about 890,000 bpd of the pledged reduction, according to Reuters estimates. The exporter group is next scheduled to meet in September to decide production policy.

Consumer nations have called on OPEC to pump more crude to help ease prices, but the group's oil ministers insist crude supplies are adequate.

DEMAND

While previous price spikes have been triggered by supply disruptions, demand from nations such as China and the United States is a main driver of the current rally.

Global demand growth has slowed after a surge in 2004, but it is still rising and higher prices have so far had a very limited effect on economic growth.

Analysts say the world is coping well with high nominal prices because adjusted for exchange rates and inflation, they are lower than during previous price spikes and some economies have become less energy intensive.

NIGERIA

Supply of crude from Nigeria, the world's eighth-largest oil exporter, has been cut since February 2006 because of militant attacks on the country's oil industry.

Oil companies have detailed about 547,000 bpd of shut Nigerian production due to militant attacks and sabotage. The amount represents about 18 percent of the West African country's output capacity of around 3 million bpd.

REFINERY BOTTLENECKS

Adding to concern about tight supply of unrefined crude is a global shortage of refining capacity.

Refiners in the United States, the world's top gas guzzler, have struggled with unexpected outages this year which drained inventories ahead of the summer, when motor fuel demand peaks.

Refining capacity is already tight after years of underinvestment.

The U.S. oil industry took a battering in 2005's Atlantic hurricane season. Some forecasters expect an active storm season this year.

IRAN

Oil consumers are concerned about supply disruption from Iran, the world's fourth-biggest exporter, which is locked in a dispute with the West over its nuclear program.

Western governments suspect Iran is using its civilian nuclear program as a cover to develop nuclear weapons. Iran denies this, saying it wants nuclear power to make electricity.

IRAQ

Iraq is struggling to get its oil industry back on its feet. Exports are stagnating at around 1.5 million bpd, compared with 1.7 million bpd or more under Saddam Hussein.

Decades of wars, sanctions and underinvestment have left Iraq struggling to pump its oil out of the ground and on to world markets. Production has failed to meet optimistic projections by oil ministry officials.

Iraq is also unable to ship crude regularly from its northern fields for export from the Turkish port of Ceyhan because of attacks on the pipeline to Turkey.

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