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Supply Concerns Drive Oil Prices to New Highs

BY Admin  April 22, 2008 at 10:05 AM EDT

Pipeline in Nigeria

The cost of light, sweet crude oil, used to produce gasoline and other key products, hit $118.05 in early trading in New York.

The jump in prices came after a Royal Dutch Shell PLC joint venture in Nigeria said Monday it would likely have to cut crude deliveries some 169,000 barrels a day in April and May because militants sabotaged a pipeline last week in the country’s restive south.

The Movement for the Emancipation of the Niger Delta (MEND) militant group claimed responsibility for the attack on the Bonny terminal in an email on Monday, saying it was aimed at “crippling Nigeria’s oil export industry.”

Shell spokesman Precious Okolobo told the AFP efforts were being made to “assess the extent of damage to the pipelines with a view to fixing them.”

Analysts said the news from Nigeria was particularly important due to the fact Shell is a major supplier of oil for refining into gasoline and other key products.

“The disruption in Nigeria with Royal Dutch Shell is serious,” Victor Shum, an energy analyst with Purvin & Gertz in Singapore, told the Associated Press.

“It is light, sweet crude, which is much desired by the U.S. market during the summer gasoline season, so that certainly has affected the market,” Shum said.

Jittery investors also drove the price of oil up after pirates reportedly fired rockets at a Japanese oil tanker.

Even before the latest supply concerns, prices at the pump were setting new records. According to the AAA auto club and the Oil Price Information Service, prices for diesel reached $4.20 a gallon this week. Those new highs would likely impact prices on other goods, and the cost for truck transportation will increase to deal with the new diesel costs.

American officials said they did not expect the situation to change.

“Oil prices are clearly too high. We are not happy with the prices or the direction they’re going in,” U.S. Acting Deputy Secretary of Energy Jeffrey Kupfer told a news conference on Tuesday, according to Reuters.

Some analysts have said the increasing price was due to the continued weakness of the American dollar compared to other currencies, but Kupfer said the problem had more to do with the continued tightness of the market and the more basic issue of supply keeping up with demand.

“Fundamentals are tight right now … Our message is take a look at fundamentals,” he said on the sidelines of the International Energy Forum in Rome, which brings together producers and consumers.

Oil consumers got little good news from the consortium of oil producing nations, OPEC over the weekend. Abdalla Salem el-Badri, secretary-general of OPEC, said on Sunday that oil prices would likely go higher, but that he doubted there was a need to raise output.

“Oil prices – there is a common understanding that has nothing to do with supply and demand,” el-Badri said, according to the British newspaper the Telegraph.