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SINGAPORE - Oil yielded little ground on Wednesday, staying within sight of its record high amid renewed investor appetite built on fears of rapidly tightening supplies this winter and a revived Middle East risk premium.
After surging more than 10 per cent in six straight days of gains,
US crude slipped 13 cents to US$87.48 a barrel at 2.30pm NZT. Prices gained US$1.48 on Tuesday and touched a new intra-day high of US$88.20, their third record peak in a row.
The latest surge has taken prices deep into uncharted territory, nearing the inflation-adjusted peak of 1980 and causing anxiety within Opec and the US administration who fear it may put the world economy under even more pressure.
Mounting tension between Turkey and Kurdish separatists in northern Iraq has fuelled the latest rally, helping lure a fresh wave of speculative and long-term investor capital into the complex, but some analysts said a correction was in store soon.
"The market is still very much focussed on the Turkey-Iraq tensions for the short-term but I believe it is overvalued by at least US$10 and will probably come off within the week," said Makoto Takeda of Tokyo's Bansei Securities.
The Turkish parliament is expected on Wednesday to grant its troops permission to launch an attack inside Iraqi territory, despite international pressure not to.
The tensions are seen as dimming hopes for a recovery in Iraqi oil exports via Turkey, which have been sporadic since 2003, but traders say the greater fear is the risk of unsettling the Middle East region, which pumps a third of the world's oil.
The impact of the geopolitical risk was magnified by concerns that Opec's 500,000 barrel per day output rise may be too little too late to maintain healthy supplies through the winter.
Already above-average US crude stocks are expected to rise a further 900,000 barrels in weekly data due to be released later on Wednesday, while distillate inventories - which include heating fuel - should ease by 400,000 barrels.
The White House sounded the alarm over prices on Tuesday, saying the administration is "very concerned". The world's largest consumer is already facing economic pressure from a meltdown in the subprime mortgage market.
The US Energy Information Administration said on Tuesday the market needs additional Opec oil but officials of the producing group said they had heard no discussion about raising output beyond the 500,000 barrels per day agreed in September.
Opec blames speculators for driving up the price, and some traders concur, noting the flood of cash now chasing returns after the US Federal Reserve cut interest rates and added billions of dollars of temporary reserves to the banking system.
Unprecedented weakness in the US dollar has also pushed investors into commodities at the start of the fourth quarter, when some investors will have reviewed allocations.
Oil prices have more than quadrupled since 2002 on the back of surging demand from developing economies but remain below the inflation adjusted peak around US$90 a barrel struck after the Iranian revolution in 1979.
- REUTERS