Oil keeps the world at fever pitch

Following the death of King Fahd bin Abdulaziz of Saudi Arabia, the oil prices soared

The world oil market has been in a fever again. Following the death of King Fahd bin Abdulaziz of Saudi Arabia, the oil prices soared. The price of American light crude rose to $61.11 a barrel by midday on Monday. The oil price at NYMEX reached $61.23 a barrel, a 3-week high. The price of Brent in London closed Monday at $60.45 a barrel.

However, most experts do not think the death of King Fahd should have a devastating impact on the oil market. Despite the fact that Saudi Arabia is the world's oil producer and principal decision-maker in OPEC, the late king played a rather minor role with respect to issues related to oil production strategy. The Saudi monarch had been ill for a lengthy period of time.

Crown Prince Abdullah was proclaimed new king of Saudi Arabia. Crown Prince Abdullah took over the Saudi oil industry in 1995 when King Fahd had a stroke. Hopefully, the changes in Riyadh will not be followed by repercussions in the Saudi economy and the world oil industry. A few hours after the King Fahd's passing was announced, Saudi officials released a statement which stressed the adherence of Saudi Arabi to its current strategic policy at the world oil market.

Meanwhile, it seems a bit premature to make a final assessment of the changes in Saudi Arabia with regard to the oil market. The new leader is unlikely to reverse the policy in terms of the world oil market and its most influential player i.e. the United States.

There is still a risk of different sort. The change of power in Saudi Arabia may be used as an excellent pretext for causing speculative market fluctuations. It is noteworthy that the world oil market is very unsteady at the moment due to the latest incidents in the upstream and downstream oil industry.

Murphy Oil refinery's hydrorefining unit with the capacity of 18 thousands barrels a day caught fire last Thursday in Louisiana. An emergency shutdown of a reformer was reported later that day in Texas City, Texas, at a refinery operated by Marathon. On Thursday night another incident occurred at a different oil facility located in the same city, Texas City. One of the production blocks of a refinery operated by BP was reported on fire. The BP refinery has a processing capacity of 460 thousands of barrels a day, it is the third largest refinery in the U.S.

The fire at the refinery was put out by Friday morning. The event resulted in a decrease of gasoline production by 35 thousand of barrels a day. The same refinery had suffered a major industrial accident in March when the blast killed 15 workers.

However, last Thursday was not the only day in a series of mishaps and tragedy for some of the world's top oil firms. A fire broke out in an accommodation block of Schiehallion field owned by BP. As a result, operations at the field were suspended. The field has output capacity of 120 thousand barrels a day.

Last week was quite tragic not only for the British and U.S. oilmen. Last Wednesday 12 people died and 367 were rescued after fire completely destroyed an oil rig 160 km off India's west cost. The oil rig is owned by ONGC, an Indian oil and gas corporation. Officials said it could take a year to rebuild the platform that produced one-sixth of the country's oil.

Total damage caused by last week's events to the world oil market could be likened to the impact of a small war on the industry. Any speculative actions relating directly or indirectly to the industry may result in further destabilization of the market. Today's situation at the world oil market is a paradise for speculators. In light of the above, most experts believe that the death of King Fahd may cease to become an ordinary event without any far-reaching consequences.

Some market analysts strongly suspect that a new reality has been taking shape in the world oil sector over the last few years. The new reality differs greatly from the old ways and methods effective in the past decades. The reality boils down to a significant increase in average oil prices at the beginning of 21st century. First, it is the booming economies of China and India that push the oil prices higher. China and India are now among the world's largest oil-consuming countries. Second, part of the problem stems from refineries whose capacity proved to be insufficient to process enough oil and produce enough petroleum products. Oil refining facilities in most countries were incapable of producing enough products to slake growing demand after the sudden surge in oil consumption worldwide. Building new refineries takes a lengthy period amount of time (from 3 to 6 years). In other words, no extra oil and products will be available to meet growing demand during that period. Given the latest incidents at U.S. refineries, intensive operations of the refining facilities may create additional risks at the whole oil sector.