March 6, 2008 / 1:33 PM / 11 years ago

FACTBOX-Why oil prices are at a record high

LONDON (Reuters) - U.S. crude oil hit a new all-time high of $105.97 a barrel on March 6, boosted by a combination of a weak U.S. dollar, tight oil supplies and OPEC’s decision not to boost supplies.

The Organization of Petroleum Exporting Countries (OPEC) on March 5 once again decided against changing its output policy, the third straight meeting when it has left supplies unchanged.

Robust demand for crude, real and threatened disruptions to supply and a weak U.S. dollar have fuelled the rally from a dip below $50 at the start of 2007.

FUNDS

Investment flows from pension and hedge funds into commodities including oil have boomed, as has speculative trading.

At the same time, a global credit crunch has brought some other markets, such as the U.S. asset-backed commercial paper market, to a virtual standstill.

Some of that money has found its way into energy and commodities, analysts say.

DOLLAR WEAKNESS

The fall in the value of the dollar against other major currencies has helped drive buying across commodities as investors view dollar assets as relatively cheap.

It has also reduced the purchasing power of OPEC’s revenues and increased the purchasing power of some non-dollar consumers.

OPEC oil ministers have noted that although prices are rising to record nominal levels, inflation and the dollar have softened the impact.

Some analysts say investors have been using oil as a hedge against the weaker dollar.

DEMAND

While previous price spikes have been triggered by supply disruptions, demand is a main driver of the current rally.

Global demand growth has slowed after a surge in 2004 but is still rising, despite an economic slowdown in top consumer the United States. Higher prices have so far had a limited effect on economic growth.

Analysts say the world is coping 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.

OPEC SUPPLY RESTRAINT

The Organization of the Petroleum Exporting Countries, source of more than a third of the world’s oil, started to reduce oil output in late 2006 to stem a fall in prices.

Fewer OPEC barrels entering the market helped propel the rally and consumer nations led by the International Energy Agency have urged OPEC to pump more oil.

At meetings in December, February and the latest one this week, OPEC left output unchanged. Some in OPEC, such as Iran, Venezuela and Algeria had pressed the group to cut supplies.

VENEZUELA

A row between OPEC member Venezuela and Exxon Mobil Corp., the largest fully publicly traded oil company, prompted price gains last month.

Venezuela has suspended oil exports to Exxon, escalating the country’s fight with the U.S. oil firm over compensation for an nationalized oil project. Venezuela has also threatened to cut exports to the United States.

Oil producers in the Middle East have assured the United States that they could compensate for a supply disruption if Venezuela slows exports.

Tensions between Venezuela and neighbor Columbia have also been an unsettling factor. Venezuela has deployed tank, air and sea forces towards its border with Columbia amid a diplomatic crisis that has threatened political stability in the region.

NIGERIA

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

Oil companies have detailed around 200,000 bpd of shut Nigerian production due to militant attacks and sabotage.

REFINERY BOTTLENECKS

Limited additions to refining capacity in major consumer nations such as the United States are partly behind rising crude prices.

The International Energy Agency said last year additional global refining capacity over the next five years will lag earlier expectations as rising costs and a shortage of engineers delay construction.

IRAQ

Iraq is struggling to get its oil industry back on its feet after decades of wars, sanctions and underinvestment.

Exports of Kirkuk crude from the country’s north are stabilizing as the system recovers from technical problems that had mostly idled the pipeline since the U.S.-led invasion of Iraq in March 2003.

IRAN

Tensions between Iran and the West led by the United States over Tehran’s nuclear program have also weighed on the oil market. Iran says its nuclear program is for electricity generation, but the West believes it is to make a nuclear bomb.

The United Nations Security Council voted this week to introduce a third sanctions resolution against Iran over its refusal to halt its nuclear work.

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