Oil: Prices stay firm on supply fears

LONDON - World oil prices came off all-time highs on Friday after this week's bull run but remained strong on fears of a supply crunch later this year.

Prices in New York and London raced to all-time highs this week as traders shrugged off Opec pledges for extra supply and doubted whether inventory levels and flagging crude output were enough to satisfy the world's seemingly unquenchable oil thirst.

A refinery glitch at the petrol unit at BP's Texas City plant -- one of the largest in the United States -- added to fears of shortages during the high-demand summer, dealers said.

US light crude was up 30 cents at $56.70 a barrel, less than a dollar under the all-time peak of $57.60 hit on Thursday. London Brent was up 34 cents a barrel to $55.40 after hitting $56.15 in the previous session.

"Record demand growth and limited spare production capacity -- it is a recipe for volatility," said Geoff Pyne, consultant to Standard Bank in London.

"We may see a short-term correction if stocks build up but it is clear that Opec will struggle to provide enough supply -- not just this year but over the next two-three years," he added.

Analysts say the strength in the oil price is more evident looking at the futures curve for forward months. US crude for August is trading for instance at a $1.50 premium to April.

Opec on Wednesday announced an immediate 500,000 barrels per day (bpd) output increase, with another half a million bpd to come if prices failed to ease. Top producer Saudi Arabia said the extra oil was meant to ward off an end-2005 supply crunch.

But with output already near a 25-year high, the group is stretched to meet demand growth. Other major exporters Russia and Norway also cannot add significantly to this year's supply.

Oil producers blame speculators, who have built up near-record length in commodity markets, for volatile prices. Analysts are now watching for a US interest rate hike that could bring back some money from oil and trigger lower prices.

Pyne said that while some long liquidation was possible, many of the funds were no longer driven by short-term charts.

"The funds have sensed something about the demand and supply situation. Many of them are focusing now on the medium term," he said.

A Reuters poll of 25 analysts, consultants and government bodies forecast the mean price for US crude at $44.90 a barrel this year, up from the 2004 average of $41.47.

But International Monetary Fund (IMF) head Rodrigo Rato said that despite the oil price, world economic growth remained on track to beat four per cent this year -- a signal the world is getting accustomed to a new oil price level.

While US petrol stocks are above year-ago levels, consumption is growing, seemingly impervious to prices and latest data this week showed a large fall in inventories.

The picture is similar the world over -- so far.

The International Energy Agency expects Chinese 2005 oil demand to rise 7.9 per cent. It projects global consumption to rise to 86.1 million bpd in the fourth-quarter demand peak -- 2.4 million bpd above the first nine months of the year.

- REUTERS