Oil price sparks fears of damage to global economy

The bull run in oil prices, which saw crude futures leap to record levels above $135 a barrel last Thursday, shows no sign of abating this week and is sparking fears among central bankers that it will inflict serious damage on the economies of the United States and other industrialised nations.

"Oil prices don't seem to be stopping their upwards march," said Kazuhiko Shibata, a senior analyst at the German-based Dresdner Bank. "Recent market optimism that the (US) economy might be nearing the end of its slump has waned," he added Black gold rose above $133 a barrel yesterday on persistent worries about global petroleum supplies and the outlook for the dollar.

Reports of an attack by militants on an oil pipeline in Nigeria, one of Africa's largest oil exporters and a member of the Opec producers' cartel, also helped boost prices. Nigeria is aslo a major supplier to the United States.

The Nigerian militants in Nigeria claimed they destroyed the pipeline and killed 11 soldiers in a gunbattle.

West Texas light, sweet crude for July delivery was up 98 cents at $133.17 a barrel in electronic dealing on the New York Mercantile Exchange. The contract rose by $1.38 to settle at $132.19 a barrel on Friday.

Nymex floor trading was closed Monday for the Memorial Day long weekend and it also was a holiday in Britain, resulting in lower trading volume than usual.

In London, July Brent crude futures surged by $1.22 to $132.79 a barrel on the ICE Futures exchange.

The US currency has weakened over the last week after a modest recovery, and investors will be watching economic data out of the United States to be released over the next few days for further clues about the health of the world's biggest economy.

"The dollar's been swinging down again," said Mark Pervan, senior commodity strategist at Australia & New Zealand Bank, and that's "going to sway sentiment."

The dollar, one of the factors that has fed oil's rally from about $65 a year ago, was slightly lower against the yen, but up a bit against the euro in currency trading during the afternoon in Europe after losing ground last Friday in New York.

Oil and other hard commodities are seen as hedges against a weakening greenback and inflation. Also, a weak dollar, the currency of international oil trade, makes petroleum products less expensive to Asian and European buyers.

This week, investors will be watching for what implications US consumer confidence, new home sales, gross domestic product and other economic data might have for the dollar and oil prices.

"It's a pretty price sensitive week for economic data," Pervan said. "The data we're seeing out of the United States at the moment looks pretty weak. You'd expect that trend to continue, pushing further down on the dollar."

Last week, a series of supply warnings rattled markets, and Thursday, a report that the International Energy Agency - the energy watchdog for the Paris-based Organisation for Economic Co-operation and Development - is in the process of lowering its forecast for long-term global oil supply, sent US crude futures rocketing to an all-time high of $135.09 a barrel and pushed up Brent to an all-time high of $135.14.

Investors are also fretting about a growing squeeze on global diesel supplies as demand in China surges ahead of the Olympic Games in Beijing. Analysts have said this has sparked a massive run up in heating oil prices. Diesel and heating oil tend to rise and fall in concert.

During the weekend, China's top economic planning agency again urged oil and power companies to make sure there are enough supplies for earthquake-hit areas and for the Olympics in August.

"They certainly want to have a buffer of supply ... so there's pressure on the upside from demand in Asia," Pervan said.

The US driving season, which soaks up a huge amount of America's petroleum supplies, officially kicked-off with the long Memorial Day weekend, and even if demand for petrol and diesel is lower than it was a year ago, it will still be stronger than it was in the preceding months. The United States is the world's largest consumer of petroleum products, most of which is imported.

Crude futures have risen by more than a third since the beginning of 2008 when they struck $100 for the first time, lifted by unrest in some of the oil-producing countries, falling energy inventories, high Asian demand for fuel and a weak dollar.

Reluctance by the Organisation of the Petroleum Exporting Countries to lift their output has also helped keep prices high.

Opec, which produces 40% of the world's oil, insists that the market is well supplied and that record prices reflect speculative investment activity rather than actual supply and demand conditions.

Prime Minister Gordon Brown and US President George W Bush has both urged the cartel to pump more crude in a move to bring prices down. Saudi Arabia, one of the key members of Opec, did agree to pump extra oil but it has failed to halt the current rally. Most Opec member states are already pumping at full capacity and have little room to put extra supplies on the market.

Last week's surge in prices sent tremors through battered global financial markets, which are still recovering from the credit crisis that erupted last August. The London Stock Exchange's FTSE-100 blue-chip ended Friday's session 94.3 points down at 6087.3, having shed more than 200 points during the week as traders fretted that oil prices will take a heavy toll on consumer spending and corporate earnings.

Exchanges on mainland Europe also notched up substantial losses and the New York market's Dow Jones industrial average also experienced a rocky week, posting several sessions of steep losses and closing 145.99 points weaker at 12,479.6 on Friday. Only a few weeks ago, US traders were talking about the Dow soaring well above the 13,000-point mark.

The British and US equity markets were closed yesterday for national holidays but Asian exchanges were open and they closed lower, largely on fears of higher oil prices, Stock market Investors on both sides of the Atlantic are expected to focus on crude oil prices when equities dealing resumes today. They year fear a return of stagflation - sluggish growth with creeping inflation. "Markets are rattled by the daily oil price rise that has become almost unbearable. That's a real threat to growth and also a big issue for inflation," said Jean-Claude Petit, head of equities at Barclays Wealth Managers France.

Stocks of energy-sensitive industries such as restaurants and airlines fell last week and another data on the slumping US housing market also gave investors little cheer. The pace of US existing home sales fell slightly less than expected, helping stocks come off their opening lows, but the inventory of unsold homes surged 10.5% in April, a sales rate that would put the supply of homes at 11.2 months.

"The rising price of crude is a detriment to the consumer. It's not that big in terms of absolute dollars, but the psychological impact is hurting sentiment," said Bucky Hellwig, senior vice-president at Morgan Asset Management, a US investment company.

"In addition to that, the value of the consumers homes continues to fall and that's getting people thinking we have another downleg in the economy and all that is very negative for stocks," Hellwig said.

As well as helping to depress share prices, the sharp rise in oil and commodities prices is creating a nightmare for central bankers. Robust petroleum prices fuel inflationary pressures and limit the ability of central bankers to cut interest rates to stave off recession. The high price of oil also inflicts economic pain on the developing economies of Asia, Africa and Latin America. Developing countries, struggling with poverty, drought, exploding birth rates and lack of infrasructure, can ill afford to pay more for oil from crimped national budgets.