Page last updated at 13:37 GMT, Thursday, 22 May 2008 14:37 UK

Who knows why oil prices are so high?

By Anthony Reuben
Business reporter, BBC News

Various reports have attributed the recent record breaking rise in oil prices to different reasons, but who is correct?

Trading on the New York Mercantile Exchange
New York oil prices have hit record highs this week

Some say it is because the Opec cartel is unwilling to boost its supply levels.

Others say it is because of fears about supplies from other countries such as Nigeria and Venezuela.

But the truth is, it could be something completely different.

The fundamentals

"Why did it happen on Tuesday? Nobody really knows for a fact what's happening or where it's going," says John Hall from the energy consultancy John Hall Associates.

So what is it that moves oil prices up and down?

"It's the fundamentals, stupid," says Mark Lewis from Energy Market Consultants.

The fundamentals are factors that influence the supply of, and demand for, oil.

Things such as the increasing demand from China and India, as well as fears that a stand-off between the US and Iran could interrupt supplies, have been raising oil prices.

Alternatively, financial factors may be at work, such as a hedge fund having to sell a particular oil contract so it does not end up receiving a tanker-load of oil - or a trader deciding it would be fun to be the first to trade oil above $100 a barrel.

The problem is, much fundamental information is not freely available.

No sense

"We really don't know what the fundamentals are doing at any point in time," Mr Lewis says.

"The markets are looking for signals from the fundamentals. Some of them are irrelevant, some of them are wrong, some of them are meaningless, but they affect prices nevertheless."

When the New York oil price broke through $100 a barrel for the first time at the start of 2008, one of the factors cited as being behind it was the assassination of Benazir Bhutto in Pakistan on 27 December 2007.

Mark Lewis, Energy Market Consultants
It's like the dotcom boom in the 1990s
Mark Lewis, Energy Market Consultants

"That didn't strike us as making any sense at the time," says Sean Cronin, editor of Argus Global Markets.

He says that people are too keen to attribute market moves to geopolitical factors.

He attributes rising prices to over-optimistic expectations of oil production by non-Opec countries - and also to signs that Opec members appear to have a greater tendency to stick to their output limits.

'Can't sit around'

These long-term trends are all very well, but oil traders have to make quick decisions.

"You can't sit around a day or two and see what happens," says Mr Hall.

"So the rocket testing in North Korea [previously cited as a reason for rising prices] or the assassination of Benazir Bhutto turned out to have no real effect, but they might have done."

Some of the factors that are more likely to influence oil supply and demand, such as figures of oil demand from China, are not available.

That means that minor news of fundamentals, such as the output of a single refinery, may be given too much weight.

"Little changes in insignificant parts of the fundamental picture, if they're visible, can have a substantial impact on the oil price - substantial in the sense of several dollars," Mr Lewis says.

Dotcom boom

So there appears to be a distinction between the factors that raise the oil price because they affect sentiment and the ones that genuinely affect supply and demand for oil.

And it may be that rises due to the former are vulnerable.

"It's like the dotcom boom in the 1990s," says Mr Lewis. "It was overinflated, but as long as everyone kept believing in it, the price went up."

"When they stopped believing in it, the price went down. And that's a warning."

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