Oil futures hit $130 a barrel due to global shortage fears

THE FEAR of a global oil shortage within five years yesterday propelled oil futures prices to well above $130 a barrel, further stoking inflationary pressures in the global economy.

Investors yesterday rushed to buy oil futures contracts as far forward as December 2016, pushing prices as high as $139.30 a barrel, up $9 on the day.

Veteran traders said they had never seen such a jump.

The spot price hit a new record of $129.60 a barrel.

Contracts to be delivered at the end of 2012 have soared almost 60 per cent, while near-term prices have risen by 35 per cent since January.

Anne-Louise Hittle, of Wood Mackenzie, said investors were shifting their focus from the short to medium term, where supply fears are dominating the thinking.

"For example, we know Iraq has the oil but we don't know if it will be able to bring the needed supplies into the market," she said, referring to the political uncertainty in the country with the world's second-largest conventional oil reserves.

This comes as demand, especially from China, is set to continue to grow.

Adam Sieminski, chief energy economist at Deutsche Bank, said: "The price is going to go up until governments that subsidise oil consumption in Asia and the Middle East can no longer afford it."

Goldman Sachs, one of Wall Street's most influential voices in the energy market, last week advised its customers to buy oil contracts for 2012.

T Boone Pickens, the influential oil investor who believes the world's oil output is about to peak, yesterday warned oil prices would hit $150 a barrel by the end of the year.

"Eighty-five million barrels of oil a day is all the world can produce, and the demand is 87 million," he said in an interview with CNBC. "It's just that simple."

Concerns over future oil supplies are fast moving into the mainstream.

Even some industry executives have warned that geopolitical supply constraints will mean oil production will not be able to match demand as early as 2012 to 2015. Those are the years that saw the greatest jump in oil prices yesterday and they have rallied since the start of the year.

"Slackening US demand is being offset by brisk off-take in Asian countries, and to a lesser extent in Europe, where the stronger euro is cushioning the price increases," said Edward Meir at MF Global.

"It's not just Boone Pickens; just about every big global bank has raised its price forecast in recent weeks," said John Kilduff, vice- president of risk management at MF Global in New York. "When prices last fell below $20 in 2001 there was a surplus. Thats no longer the case. Theres now a deficit." A weekly report from the US Energy Information Administration to be released today is expected to show increases in crude and refined products supplies.

The nervousness about Chinese energy demand was exacerbated yesterday when officials said 32 power plants had been forced to close because of coal shortages, the second time this year the power industry has run short of coal.

PetroChina and Sinopec, the two largest domestic oil groups,have diverted fuel supplies to the quake-hit Sichuan region in the past week, while China's State Reserves Bureau has released oil products to ensure supplies in the area. PetroChina said that 99 per cent of production had been restored to pre-earthquake levels. - ( Financial Times service)