Riyadh, Tehran cause price spike OIL PRICES

12 August 2005
Oil prices jumped to more than $60 a barrel on the death of Saudi Arabia's King Fahd but were also driven by increasing tension between Washington and Tehran and refining problems in the US. Spot Brent was trading at $61.50 a barrel on 3 August, compared with $58.84 a barrel a week earlier.

King Fahd's death immediately caused market jitters, in spite of assurances from Saudi officials that oil policy would be unaffected - unsurprisingly, since new King Abdullah has been the de facto ruler for so long and enjoys a close relationship with the US. Petroleum & Mineral Resources Minister Ali Naimi remains in his post. Saudi Arabia's next ambassador to Washington and current ambassador to the UK, Prince Turki al-Faisal, said on 1 August that the kingdom would continue its longstanding policy of servicing global oil markets.

Of greater geopolitical concern was the mounting tension between the West and Iran over nuclear policy, which provided added support to prices over the course of the week. In a letter to the International Atomic Energy Agency (IAEA) in late July, Tehran announced its intention to resume uranium enrichment activity at its Isfahan plant on 1 August, prompting the threat of referral to the UN Security Council and possible sanctions. And on 6 August, new president Mahmoud Ahmadinejad will take office, expected to bring a more hardline stance towards the international community.

Fears about ongoing tightness in US product markets were increased in late July by fires at two major US refineries in Texas operated by BP and the US' Marathon Oil Company. The BP refinery, the country's third largest and source of about 3 per cent of US gasoline supplies, was subsequently closed completely for maintenance - at a time when warm weather is pushing up gasoline demand. Gasoline stocks fell by 1.9 per cent or 4 million barrels in the week to 29 July. The refinery outages are being widely interpreted as the consequence of a year and a half of flat-out production necessitated by sparse spare capacity.

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