Oil 'Will Hit $100 By Winter'

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Oil 'Will Hit $100 By Winter'

Worst-ever crisis looms, says analyst · Surging demand to keep prices high

Heather Stewart, economics correspondent
Sunday July 3, 2005
The Observer

Oil prices could rocket to $100 within six months, plunging the world into an unprecedented fuel crisis, controversial Texan oil analyst Matt Simmons has warned.

After crude surged through $60 a barrel last week, nervous investors were pinning their hopes on a build-up in US oil-stocks to depress prices in the coming months.

But Simmons believes surging demand will keep prices bubbling well above $50. 'We could be at $100 by this winter. We have the biggest risk we have ever had of demand exceeding supply. We are now just about to face up to the biggest crisis we have ever had,' he said.

Opec producers held emergency talks last week to consider making their second 500,000 a barrel increase in production quotas in a fortnight: but the discussions were suspended last Thursday after prices dipped back below $60.

The looming oil crisis is not high up the agenda at this week's G8 meeting, although the heads of state are expected to repeat their finance ministers' call for greater transparency from Opec and other oil-producing nations about their reserves.

However, global warming is one of Britain's two major priorities, and Tony Blair hopes to secure a pledge to pour more cash into developing alternatives to the oil-intensive technologies that cause climate change.

Simmons believes such moves will be too little, too late. He will publish a hard-hitting book this week in which he argues that Saudi Arabia, the world's largest producer, is running out of oil, and further price rises are inevitable as supplies decline. He warns that the scramble for resources could eventually descend into war.

Many analysts expect extra production over the next year, as high prices boost investment by energy firms. But Simmons says after many years of underinvestment, there is even a shortage of drilling rigs.

'Many of these projects are aspirations; many of them won't create peak production in the first year, and many of them within five years will be in decline,' he said.

However, the Economist Intelligence Unit predicts that oil prices will peak by the end of this year, and decline by 10 per cent in 2006 as the Chinese economy slows, reducing demand. Chinese imports have been crucial to propping up the oil price in the last two years.

But the EIU warned that its forecasts - which show a 30 per cent increase in oil prices for 2005 - could prove too conservative if there are further wobbles in supply. 'The narrow margin of spare production capacity has made prices vulnerable to unforeseen reductions in supply or rises in demand,' it said.

Paul Horsnell, head of commodities analysis at Barclays Capital, said supply constraints would continue to bite for the rest of the year. 'It's all getting a bit tight'

Brent crude closed almost $2 a barrel higher in New York on Friday night, while futures contracts for heating oil, widely used in the US, hit a record high, which analysts said was unusual for summer.

'It's fear,' said Kyle Cooper, an analyst at Citigroup. 'It's not based on what is happening now. It's based on fear of what could happen.'