Oil traders are right to be nervous

We've never subscribed to the view that last year's high oil price was a one off and that this year would see prices falling back to the $40 a barrel level. Instead, we've long been convinced that rising demand and limited supply would keep the price high regardless of political events, but that geopolitical tension might well push it much higher still.

By Annunziata Rees-Mogg

published 20 February 2006

in Features

We've never subscribed to the view that last year's high oil price was a one off and that this year would see prices falling back to the $40 a barrel level.

Instead, we've long been convinced that rising demand and limited supply would keep the price high regardless of political events, but that geopolitical tension might well push it much higher still.

So far this year that seems to have been a reasonable stance. Osama bin Laden's latest warning, along with Iran's decision to remove assets from European banks in advance of any possible nuclear-related sanctions against it, have sent "shockwaves" through the oil markets, with the price of Brent oil in London shooting up $1.20 a barrel to reach $66.43, near last year's all-time high of $67.48, says The Daily Telegraph.

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Oil traders are right to be nervous, says Edward Hadas on Breakingviews.com. A big disruption in Iran could be "worse than anything created by the Iraqi war". Iran currently produces 5% of the world's oil, whereas pre-war Iraq only produced 3%. Saudi Arabia has been willing to make up for lost oil production from Iraq, but may be reluctant to do the same to undercut Iran.

But the Middle East isn't the only energy problem about, says The Guardian. Russia is flexing its muscles too. On New Year's day it quadrupled the price of the gas it supplies to Ukraine. And more recently, Georgian president Mikhail Saakashvili blamed Russia for sabotaging its gas pipelines. These problems have blown over, but they've made it clear we can't depend on Russian oil either.

Annunziata was a deputy editor at MoneyWeek, covering financial markets, politics, economics and comment pieces. She then went on to the Daily Telegraph as a lead writer where she wrote a column on young women’s financial issues. She was briefly a member of the European Parliament for the East Midlands region in the UK as part of the Conservative Party. Annunziata continues to write as a freelance journalist.