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Skittish traders send oil soaring

The death of Saudi Arabia's king, and worries over U.S. refinery problems and Iran's nuclear program push prices up $1 to a new high of $61.57.

WASHINGTON - Oil prices jumped $1 a barrel to a new high Monday after the death of Saudi Arabia's King Fahd raised concerns about the kingdom's long-term political stability. The rally, which faded late in the day, also stemmed from traders' skittishness about U.S. refinery glitches and Iran's nuclear program.

Saudi Arabia's oil policy is not expected to change now that power has formally shifted to Fahd's 81-year-old brother, the de facto leader during the past decade. But with oil consumption rising around the world and only a limited amount of excess production capacity available, energy traders are easily put on edge by a change in the weather in an oil-pumping region, let alone a transfer of authority within the world's biggest oil producer.

"The market is hypersensitive to facts, rumors and noise because the supply cushion is gone," said Larry Goldstein, president of the New York-based nonprofit Petroleum Industry Research Foundation.

Light sweet crude for September delivery briefly rose as high as $62.30 a barrel on the New York Mercantile Exchange, then retreated to settle at $61.57, a rise of $1. The previous closing high on Nymex was $61.28, set July 6, and the previous intraday high was $62.10.

Oil prices are still well below the inflation-adjusted high of about $90 a barrel set in 1981.

Adding to the oil market jitters was the imminent resumption of uranium reprocessing in Iran. It is one step below uranium enrichment, which is necessary for the development of nuclear weapons. Iran suspended enrichment of uranium in November under international pressure, but the country maintains that it has the right to resume the activities.

Traders also focused on refinery operations in the United States, where the rate of gasoline and heating oil output has fallen in recent weeks due to hurricanes in the Gulf of Mexico. Last week, two refinery fires - one in Texas, one in Louisiana - stifled production, albeit to a limited extent.

Meanwhile, the retail price of regular-grade gasoline rose slightly last week to average of $2.29 a gallon nationwide, the Energy Department said Monday, or 40.3 cents a gallon higher than the same time a year ago. The record high was $2.33 per gallon, established the week ending July 8. Adjusting for inflation, retail gasoline prices peaked above $3 a gallon in 1981.

The average price for regular-grade gas in the Tampa Bay area was $2.24 a gallon Monday, AAA said.

King Fahd died early Monday after a prolonged hospitalization, the Saudi royal court said. His brother, 81-year-old Crown Prince Abdullah, was appointed the monarch in a smooth transition that had been years in the making. Abdullah immediately named his half brother, Defense Minister Prince Sultan, 77, as his crown prince and successor.

Saudi Arabia's ambassador to Britain, Prince Turki bin al-Faisal, said the nation wouldn't change its policy on oil or other matters.

"It's going to be business as usual inside Saudi Arabia," Goldstein said. The longer-term concern is that each successive transition of power in Riyadh will become trickier, he said.

Antoine Halff, director of global energy at Eurasia Group in New York, described the oil market's response to Fahd's death as "a bit of a knee-jerk reaction" but not an entirely surprising one given Saudi Arabia's importance to the global economy and the fact that "its political system is so opaque."

The market will pay close attention now to how Abdullah responds to any internal political and social opposition he faces as a result of his agenda of reform and the crackdown he has led on militants linked to al-Qaida.

Halff said he expected the buying triggered by the news out of Saudi Arabia to be short-lived but that other factors in the market could keep prices high for months.

With daily global demand expected to average more than 84-million barrels a day and excess production capacity below 2-million barrels per day, traders' fears about potential output disruptions were also sparked Monday by the anticipated restart of uranium reprocessing in Iran.

Iran agreed late Monday to a two-day delay in reopening its nuclear processing plant in Isfahan after receiving a request from the head of the U.N.'s atomic watchdog agency. Originally, the activity was to restart Monday.

The United States says the Iranian nuclear program is designed to produce weapons, a claim Iran denies. Friction between the two countries is worrisome to oil markets because the United States is the world's largest consuming nation, and Iran is the second-biggest producer within the Organization of Petroleum Exporting Countries.

[Last modified August 2, 2005, 02:45:17]