Traders Ignore Supply As Oil Nears $130 a Barrel

The price of oil hovered near a new high of $130 a barrel Tuesday as investors continued to ignore the prospect of more supply this summer and instead focused on bullish forecasts from investment banks and the influential oilman T. Boone Pickens.

Traders were encouraged to add to their positions after Pickens said he expected crude prices to reach $150 a barrel this year.

The investment banks Credit Suisse and Societe Generale also raised their forecasts for average oil price for 2008 .

Light sweet crude for June delivery rose to an all-time high of $129.60 a barrel on the New York Mercantile Exchange. In London, the benchmark Brent crude futures contract was up $2.15 at $127.21.

Last week, the most active investment bank in the energy market, Goldman Sachs, helped to push the oil price above $127 a barrel when it predicted prices would average $141 in the second half of this year.

The market has been pushing higher in recent days amid reports of strong Chinese demand, on the weak dollar and amid a fear of tight supplies of refined products in advance of the U.S. driving season.

Supplies have come under increasing strain following the earthquake in China last week, which disrupted natural gas supplies and increased demand for diesel to be used in electric generators.

"Slackening U.S. demand is being offset" by demand from Asia, said Edward Meir, an analyst at MF Global. He added that demand in Europe was relatively robust as "the stronger euro is cushioning the price increases."

"All this suggests that the overall crude picture remains very much unchanged, leaving the market free to push higher on the back of receptive fund money," he added.

At least half a million extra barrels of oil are expected to flow to world markets each day in June but, so far at least, the prospect of the improved supply this summer has done little to bring down prices from record-high levels.

Traders ignored news that Saudi Arabia, the world’s biggest oil exporter, had been pumping an extra 300,000 barrels a day since May 10 and would maintain production levels in June.

The market also dismissed higher export targets for Iraq, which aims to raise shipments by at least 125,000 barrels a day in June.

Washington has been trying to dampen price rises. Last week, the government approved legislation to stop refilling the U.S. emergency stockpile until crude prices fell below $75 a barrel. The effect is to add around 75,000 barrels a day to the market.

In addition to all that, shiploads of Iranian oil have been floating at sea for weeks awaiting buyers.

And members of the Organization of Petroleum Exporting Countries have repeatedly said supplies are plentiful.

"There is more oil in the market than consumers want," the Iraqi oil minister, Hussain al-Shahristani, said Monday. "What is driving up prices is an increase in speculative funds. An increase in production by OPEC countries would not really change the scenario – it would not affect the price."

David Dugdale, an analyst at MFC Global Investment Management, the asset management division of Manulife Financial, estimated that the "marginal cost" of oil to be about $80.

The marginal cost is the amount required to bring on hard-to- access oil only considered viable when other supplies fail to meet demand. It can be viewed as a level below which prices are unlikely to fall.

In theory, after periods of volatility, commodity markets should eventually revert to a price that reflects fundamentals of supply and demand because they are underpinned by raw materials. If buyers do not emerge when prices are high, a surplus will build and prices deflate.

Olivier Jakob, of the trade advisory company Petromatrix, called it the fundamentals rule, "but the question is whether the futures market should reflect the fundamentals of the next few months or of the next few years."