Page last updated at 21:32 GMT, Wednesday, 11 June 2008 22:32 UK

Oil rises on crude supply concern

BP Grangemouth petrochemical plant
Observers have complained the oil market is not acting rationally

Oil prices have leaped amid concerns that demand will outstrip supply, taking crude near record highs.

New York light, sweet crude jumped $5.49 to $136.80 a barrel, adding as much as $7 earlier. London Brent rose $4 to $135.02, erasing higher gains.

Analysts said a sharp decline in US stocks spooked the market. A report from oil firm BP saying production had fallen also boosted prices.

Last week, oil hit a record of above $139, and higher prices are forecast.

Analysts have predicted that oil prices could power past the $200 mark in 18 months.

They have soared 40% this year, causing protests across Europe and Asia at the subsequent higher fuel prices and increases in the cost of living.

Falling inventories?

The higher oil price is partly due to a US government report showing that crude stocks fell much more than expected.

US inventories declined by 4.6 million barrels to 302.2 million barrels last week, the fourth weekly drop in a row, figures from the Energy Department showed. Analysts had expected a decline of about 1 million barrels.

This is particularly concerning as US petrol demand increases during the summer months, when many American families take to the highways for holidays.

With the hurricane season approaching, there is also a worry about damage to US refineries.

Exacerbating the fall in inventory, a report from British oil giant BP revealed that global oil production fell for the first time in five years, down 0.2%, while consumption increased by 1.1%.


The figures highlighting the imbalance in production and consumption trends were reported in BP's 2008 Statistical Review of World Energy.

BP attributed this to the Organization of Petroleum Exporting Countries (Opec) cutting production in November 2006 and in February 2007, and oil fields in various parts of the world reaching maturity.

Demand for oil is on the increase as emerging countries such as China and India look to fuel their expansion.

China recently said it had imported 25% more oil in May to support repairs in regions that were damaged by the massive earthquake that killed thousands of people.

The world's second-largest crude oil consumer imported some 3.8 million barrels a day, or a total of 16.2 million metric tons for the month, to aid with reconstruction after the natural disaster.

Fading greenback

As well as supply and demand issues, a weaker US dollar has also pushed up the price of oil as investors look to offset the drop in the currency by buying other, better performing assets.

Investors are increasingly using oil as a hedge - or protection - against a weaker dollar, investing in one when the value of the other falls.

There also have been geopolitical issues behind the oil price increases, such as fears that the US will attack Iran in an attempt to stop Opec's second-largest oil producer from developing nuclear capabilities.

Analysts have said that despite the recent fluctuations in price, oil is unlikely to fall significantly and, if anything, the danger is that prices will surge even higher.

On Tuesday, the boss of Russian energy producer Gazprom said that he expected oil prices to get as high as $250 a barrel, even more than the $200 figure forecast by some of Wall Street's top analysts.

Saudi Arabia has invited heads of state from oil producing and consuming nations to a meeting on 22 June to discuss the high prices.

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