Stocks news offsets security fears

18 October 2002

The oil price stayed high in mid-October, bolstered by security concerns amid an apparent revival of Islamist terrorist groups, but pressured by an unexpected and sharp rise in US crude oil stocks. On 16 October, the benchmark Brent crude was trading at $28.66 a barrel.

The bomb attack in Bali on 12 October seemed to confirm fears that Al-Qaeda and its allies had re-established themselves. The bloodiest attack since 11 September events, it was the culmination of a fortnight rife with security incidents.

The attack on US marines in Kuwait, the explosion that crippled a French oil tanker off Yemen and Qatari television channel Al-Jazeera's receipt of a fax purportedly from Osama bin Laden suggest that a more active phase of attacks is under way. The nature of the attacks also suggests that groups are now focusing on economic targets.

For much of 2002, high oil prices have been underpinned by a political premium - usually estimated at about $4 a barrel - caused by concerns over security in the Middle East and a potential US military campaign against Iraq. Fears revolve around the disruption of oil exports from Iraq and, in a worst-case scenario, other Gulf producers.

But OPEC has guaranteed a steady stream of oil. 'I hope there will be no war against Iraq, but in the event of a cut in world crude supplies, we will be ready to pump more oil because we have adequate means to do so,' OPEC president Rilwanu Lukman said on 14 October. 'We do not need to draw up an emergency plan since we have the means to supply the market and war will have no impact on our means.'

Set against the short-term security fears boosting the oil price, longer-term market fundamentals are often overlooked. However, one possible outcome of a war against Iraq is damage to the global economy, which would reduce oil demand and put downward pressure on prices.

Crude stocks in the US have been steadily diminishing for seven straight weeks, but in mid-October the American Petroleum Institute recorded a sharp rise of 9.4 million barrels. While the rise is mainly due to a compensation for recent weeks, when imports were constrained by violent storms in the Caribbean and Gulf of Mexico, it also raises questions about demand. In the northern hemisphere winter, demand is traditionally at its strongest, but last year a spell of warm winter weather decreased fuel use and weakened demand. Oil producers are now holding out for a colder spell of weather.

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