Crude oil jumps to all-time high above $86 amid fears on supplies

By Javier Blas in London, Financial Times
Published: Oct 16, 2007

Crude oil prices yesterday jumped to an all-time high above $86 a barrel amid warnings of tight supplies ahead of the winter peak in demand for energy.

The threat of a Turkish military operation against Kurdish guerrillas in northern Iraq helped spur the crude rally yesterday but traders said the main factors driving prices higher were low inventories, relatively strong demand and only a timid boost to production from the Organisation of the Petroleum Exporting Countries.

Francisco Blanch, chief commodities strategist at Merrill Lynch, said an early winter cold snap or a serious geopolitical problem in the Middle East "could drive oil prices even to $100 a barrel". Doug Leggate, of Citigroup in New York, added: "A run to $90 is now seen as reasonable."

In New York, West Texas Intermediate crude oil prices surged to a record intra-day high of $86.22 a barrel. It later traded up $2.44 to close at $86.13 a barrel.

Robust demand from developing countries, led by China, and low non-Opec production triggered a decline in inventories in the third quarter, according to the International Energy Agency.

That has left the market "running a lofty deficit" ahead of a peak in consumption during the northern hemisphere winter, said Kevin Norrish of Barclays Capital.

Low inventories prompted Opec recently to agree to boost its output by a meagre 500,000 barrels a day from November.

The cartel opted for a small increase on concerns about the strength of the global economy and oil consumption. However, Opec yesterday said that demand for its crude oil will this winter be stronger than expected.

"Downward [economic] pressure has receded in recent weeks, following the US Federal Reserve's decision to cut US interest rates by half a per cent," Opec said.

Julian Lee, of the Centre for Global Energy Studies, said that the cartel should take action immediately to increase further its production without waiting for its December meeting.

Traders are braced for further geopolitical tension as the Turkish parliament is expected to approve tomorrow a motion that gives Ankara permission to launch an attack on Kurdish separatists in northern Iraq.

The US opposes such a move, fearing the instability that it could cause.