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Oil approaches $50 a barrel; global economy to pay price

By BRAD FOSS
The Associated Press

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Underpinning the market's nervousness is the belief the Organization of Petroleum Exporting Countries — and member Saudi Arabia in particular — does not have the ability to swiftly raise production high enough in the event of a major global supply disruption.

U.S. light crude for September delivery rose $1.43 to close at $48.70 on the New York Mercantile Exchange — the highest Nymex settlement on record. When adjusted for inflation, oil is roughly $8 less per barrel than it was leading up to the first Gulf War.

That disparity is quickly disappearing, though, and economists are increasingly worried that high energy prices are damaging growth in the United States and around the world.

"We've been dropping our economic forecast pretty regularly now as the price of oil goes up," said Sung Won Sohn, chief economist at Wells Fargo in Minneapolis.

Wells Fargo predicts the nation's gross domestic product will rise 3.5 percent on an annualized basis in the second half of the year, down from 4.5 percent just a couple of months ago. "That represents hundreds of thousands of jobs," said Sohn.

"The oil price is firmly in the danger zone," Stephen Roach, chief economist at Morgan Stanley in New York, wrote in a note to clients. Should prices reach $50 and stay there for several months, this would be "in the ballpark with full-blown oil shocks of the past" that have caused recessions, he said.

The International Energy Agency, adviser to 26 industrialized nations, raised its projections of 2004 oil demand to 82.2 million barrels a day earlier this month. Meeting that demand will take almost all of the world's output, said Boone Pickens, the Texas oil investor who predicted in May that oil prices would go to $50.

"The market has taken the disruption in Iraqi oil supplies very seriously," said James Steel, director of commodities and oil research at Refco, a New York-based brokerage.

Iraqi output and exports have been hampered by fighting in southern Iraq, putting pressure on oil prices at a time of strong demand in China and the United States and supply concerns in Russia, Venezuela and other petroleum-producing nations.

"The market has been able to accommodate a supply disruption from one source," Steel said. "But what makes oil prices jittery is when you have the possibility of disruptions from several sources at once."
 
"The crude-oil market has been trending higher on rotating supply concerns, with Iraq currently on the top of the list," said Tim Evans, a senior analyst at IFR Markets in New York.

There were also technical factors behind yesterday's upward move. Traders said those who had waited on the sidelines in recent weeks, hoping prices would fall, came into the market as buyers yesterday to secure next month's supply. The September contract expires Friday.

The price of crude is 59 percent higher than a year ago and has spiked by almost 31 percent since the end of June.

"Fifty dollars isn't so unreasonable anymore," said Victor Shum, oil analyst at Texas-based energy consultants Purvin & Gertz in Singapore.

"Right now, oil is on a straight beeline for $50 a barrel" in the next two weeks, said Michael Cavanaugh, analyst at the brokerage MyFuturesOnline.com.

"Until there is positive news that supplies will not be disrupted or that traders see there are no more chances that other new surprises could emerge, prices will remain high," said John Person, head analyst at Infinity Brokerage Services.

Material from Bloomberg New and Knight Ridder/Tribune Information Services is included in this report.