Fear for growth as oil futures hit $40 a barrel

Crude oil futures reached $40 a barrel yesterday for the first time since the 1990 Gulf War, sparking increased fear for global economic growth.

The psychologically important $40 barrier was breached as the security of supplies from the Middle East continued to cause concern. Unrest in Iraq and in Saudi Arabia, the biggest producer, was unnerving the markets, traders said. The high value of crude meant that the price of petrol at pumps in London topped 82p a litre yesterday.

Outside the Middle East, there was also concern over political events in two other important producing countries, Venezuela and Nigeria. Julian Lee, of the Centre for Global Energy Studies, said that geopolitics was playing a big role in driving up the oil price, but so too were fundamentals.

Mr Lee said there was a tightness in the market which looked as if it was going to be sustained for some time. This was primarily a result of a cut in supply from Opec, combined with stronger than expected demand from the US and China. Added to that were low commercial stocks of oil across the world, especially in the US.

"Suddenly this year demand has taken off... The fears of supply disruption are not going to go away any time soon or commercial stocks rise dramatically," Mr Lee said. When Opec cut output earlier this year, it based its decision on fears that prices might collapse. The cartel of oil-producing countries will now not meet until June. In trading yesterday, US light crude touched $40 for the first time since October 1990, after Iraq's invasion of Kuwait in the crisis that led to the Gulf War. It later eased to $39.58, 21 cents higher on the day. London Brent peaked at $37.18 and at 4pm was up 26 cents at $36.79 a barrel. "The explosive cocktail created by Opec actions, Saudi oil policy, US logistical bottlenecks and US foreign policy are set to keep oil prices on fire this summer," Washington consultants PFC Energy said.

In the US, the Bush administration is concerned about the impact of high gasoline prices in a presidential election year, and is calling on Opec to ease prices by increasing output. Britain's Treasury said yesterday that Opec had set a target price band of $22 to $28 a barrel and it should try to meet this. Opec, however, blamed a shortage of refining capacity in the US and heavy betting by speculative investment funds on oil futures for price gains of 22 per cent since the start of the year. "The reasons that are affecting the world oil market are really beyond Opec's control," said its president, Purnomo Yusgiantoro. "The gasoline markets in the US are really tight, and secondly, there is speculation. It is very difficult to control speculation."

Analysts have said that Saudi Arabia no longer has the incentive to cushion the US by restraining the cartel's price hawks. "The political message coming from Saudi Arabia over the last three years has made it clear that the days when the kingdom was willing to blindly accommodate US interests are gone," said PFC Energy.