Traders bet on oil hitting US$80 a barrel

LONDON - Record oil prices may increase to US$80 ($118) a barrel this year, options contracts on the New York Mercantile Exchange show.

Investors are speculating that Opec will not produce enough oil to compensate for any disruption to supplies.

New York Mercantile Exchange data shows 6900 options contracts outstanding that allow the buyer to purchase crude oil for December delivery at US$80 a barrel, compared with an average of US$77 in January.

The probability that oil will top US$75 a barrel when the December crude contract expires is 21 per cent, say Adam Sieminski and Michael Lewis, strategists at Deutsche Bank AG, up from 5 per cent at the start of the year.

"The perception is that the risk of higher prices now is higher than at the beginning of this year," Sieminski said.

"The market is so tightly balanced that issues like a nuclear confrontation with Iran could add a great deal of worry [about supplies]."

The Organisation of Petroleum Exporting Countries, the producer of about 40 per cent of the world's oil, is pumping almost as much crude as it can to increase inventories before an expected fourth-quarter peak in consumption.

Crude oil reached a record US$60.95 on June 27, deepening concern that the cost of energy would slow economic growth.

Oil prices have surged 53 per cent in the past year over concerns that producers and refiners will strain to meet demand for products ranging from petrol to diesel and heating oil.

United States Treasury Secretary John Snow said on June 28 that high prices were hurting the world economy.

German Chancellor Gerhard Schroeder on June 27 called for more transparency in global oil markets to stem speculation and lower prices from levels that are threatening to crimp expansion.

The OECD in May cut its global growth estimate for this year and next, partly because of rising energy costs.

It now expects economic growth of 2.6 per cent this year for its 30 member nations, down from its previous semi-annual forecast in November of 2.9 per cent. Next year it expects growth to reach 2.8 per cent instead of 3.1 per cent.

Oil companies are profiting from the price surge. Exxon Mobil, BP, Royal Dutch/Shell Group, Chevron and Total SA, the five largest publicly traded oil companies, reported combined net income of about US$85 billion last year, when prices averaged more than $41 a barrel.

Shares of energy companies are rising. The Morgan Stanley Capital International World Energy Index, one of 10 industry groups making up the global equity benchmark, is leading gains with a 17 per cent surge this year.

A former Saudi Arabian Oil Minister, Sheikh Ahmad Zaki Yamani, said that US$100 a barrel "isn't far-fetched".

For that to happen, he said, "it needs the help of a political event or a military adventure, like attacking Iraq. It would be disastrous."

William Dudley, the chief US economist at Goldman, Sachs & Co. in New York, said on June 14 that a supply disruption of "a couple of million" barrels a day could send prices to $105.

The International Energy Agency predicts global oil demand will rise to a record 86.4 million barrels a day in the fourth quarter.

- BLOOMBERG