Oil Spikes Above $135 on Supply Worries

By Graham Bowley and David Jolly

Caroline Brothers contributed reporting from Paris.

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Fears that world oil demand would outstrip dwindling global supplies intensified Thursday, sending the price of oil sharply higher, after the International Energy Agency warned about difficulties in expanding production.

The price of U.S. crude oil for July delivery rose to $135.09 a barrel in Asian trading, before falling back to $132.51 at midday in New York, down 66 cents from Wednesday’s close as traders sold crude to lock in profits.

On Wednesday, weaker-than-expected weekly inventory data in the United States, the world’s biggest economy, stoked fresh worries over oil supplies, sending the price up $4.19 a barrel, or 3.2 percent, on the day.

These fears about global supplies intensified Thursday after the International Energy Agency, based in Paris, said it was considering reducing its assessment of the long-term world supply of crude oil after a study of depletion rates at the world’s 400 biggest fields.

An article Thursday in The Wall Street Journal that said the agency was preparing to sharply reduce its forecast for global oil output also contributed to the rise in prices. The energy agency has long forecast a slow but steady increase in production that would keep pace with demand. Output was projected to reach 116 million barrels a day in 2030, from 87 million barrels a day now. According to the report, which did not cite its source, the agency now expects to cut that to 100 million barrels or less.

"We are conducting a major study," Fatih Birol, the agency’s chief economist, said, "and we are going to revise our oil supply prospects."

"We don’t know the results yet," he added, saying they would be conducted "project by project and field by field."

"But there are difficulties in expanding production," he said, adding that the World Energy Outlook 2008, scheduled to be published in November, would take that into account.

John Kilduff, an energy analyst at MF Global, said, "Clearly this is the issue we have had for a while of an increased deficit in consumption versus production." He added, "That’s produced this creep up in the rise in oil prices. The market gets hit on a daily basis."

Even allowing for the effects of a changing supply-demand balance, there are considerable signs of speculative froth in the market. While the most common explanation given for rising oil prices is China’s growing appetite for fuel, Michael Masters, a portfolio manager at Masters Capital Management, said Tuesday in testimony to a U.S. Senate committee that the increase in demand from index speculators over the past five years was almost equal to the increase in Chinese demand.

On Thursday, the biggest European airline, Air France-KLM, warned of a profound reshaping of the industry worldwide caused by what it called the "explosion" in the price of oil.

The data Wednesday from the U.S. Energy Department showed that commercial inventories of crude oil in the United States fell more than five million barrels last week; analysts had expected a modest increase. Gasoline inventories also fell last week. The fall in inventories added to worries about oil supplies in the United States ahead of the busy summer driving season.

The devastating earthquake last week in China has also been weighing on markets, Kilduff said. It has deepened the fears about global supply because the Chinese authorities are now diverting energy supplies for their own needs.

"China has reacted by holding supplies off the international market," he said. "We also saw them make a major purchase on the world market."

He said that a number of China’s coal plants had been temporarily shut down, which meant the country would start to increase its demand for diesel.

He said that the latest reports meant he would likely raise his forecast for the price of oil. "We are going to raise that," he said. "Clearly now the medium term favors a price of above $140."

With crude oil rising above $135 a barrel, an increase of more than 100 percent in a year, the business strategies airlines adopted a decade ago have been thrown into question. The International Air Transport Association said May 2 that growth in international traffic was slowing, and that "the fortunes of the industry have taken a major turn for the worse."

"Things are moving very quickly," Jean-Cyril Spinetta, the chief executive of Air France-KLM, said Thursday before the company announced its first quarterly loss in five years.