Crude futures ease back after new high

Oil prices set new highs above $57 a barrel Thursday and analysts said the rally appears to have steam left even after a nearly $15 climb since the start of the year.

The runup has coincided with dollar weakness and rising global demand at a time when there is very little excess supply available. OPEC tried to ease market jitters on Wednesday by raising its output quota by a half-million barrels a day and raising the possibility of an additional hike, but traders were unimpressed by the largely symbolic move and pushed crude futures to a record settlement high on the New York Mercantile Exchange.

On Thursday, light sweet crude for April delivery rose 29 cents to $56.75 a barrel in afternoon Nymex trade, retreating from a high of $57.50.

While the price of oil is more than 50 percent higher than a year ago, crude futures would have to climb above $90 a barrel to approach the all-time inflation-adjusted high set in 1980.

Brent crude also reached new highs on Thursday, hitting $56.15 a barrel before edging back. In afternoon trading it rose 61 cents to $55.49 on the International Petroleum Exchange.

"I don't see anything that can take this thing down," said Michael Guido, director of commodity strategy in New York for Societe Generale. He said the fear of a supply problem - not an actual supply problem - is driving the market psychology.

If the economy took a turn for the worse, signaling a drop in energy demand, then prices might fall, Guido conceded.

But that is not what economic forecasters are anticipating.

"People are not rationing their gasoline expenditures or rationing their driving," said Smith Barney economist Steve Wieting, who believes the U.S. economy will continue to grow at a healthy clip of 4 percent in 2005.

"The notion that unless oil is $20 a barrel we can't grow has been debunked," he said.

While inflation has remained tame so far, economists said it is likely that economic growth would be even stronger if energy prices were cheaper.

In a monthly report released Thursday, the Organization of Petroleum Exporting Countries warned that economic growth in the United States, China and Japan would push demand for its oil even higher in the second half of this year. "Oil prices rose further in March and the capacity of consumers and companies to absorb such increases is a further uncertainty," OPEC said.

OPEC members meeting in Iran on Wednesday agreed to boost the group's output quota by 500,000 barrels a day, or 1.9 percent. The market brushed off the decision, however, because members of the oil cartel who are supposedly bound by its production quota are already exceeding the previous ceiling by about 700,000 barrels a day - meaning no extra supply will actually be added.

OPEC also left open the possibility of raising its output quota by an additional 500,000 barrels and its president reiterated that position on Thursday.

"If prices stay as they are in the next seven to 10 days, we will start contacting minister colleagues to discuss the other 500,000 (barrels a day) that the president has the authority (to decide on) after consultations," said Sheik Ahmed Fahd Al Ahmed Al Sabah, who is also Kuwait's energy minister.

Bruce Evers, an analyst with Investec Securities, said traders are convinced the announcement "won't be enough and it's going to leave the supply side of the equation very stretched."

With the world's excess production capacity at 1 million to 1.5 million barrels a day and demand exceeding 84 million barrels a day, an unforeseen supply disruption later this year - like a bad hurricane season in the Gulf of Mexico or political instability in Nigeria or Venezuela - could send prices even higher, Evers warned.

Simon Wardell, an analyst with the Global Insight consulting group, said OPEC was producing almost all the oil it can pump and that "this is definitely a structural price change" driven by demand outpacing supply.

Oil demand in China, the world's second-biggest consumer after the United States, will rise 500,000 barrels a day to 6.88 million barrels a day, according to the Paris-based International Energy Agency.

Because crude is denominated worldwide in U.S. dollars, and because the currency has lost nearly 10 percent of its value against the euro in the past year, OPEC nations have signaled support for higher oil prices in order to maintain their buying power in Europe.

While there are signs that the decline of the dollar and the surge in oil have recently pushed up prices for consumer and wholesale goods, the Federal Reserve has indicated that it is not worried about a damaging inflationary trend.