RIYADH, Sept 22: Oil markets are touching new heights. Significant drop in US crude inventories, shutdown of nearly 200,000 barrels from Alaska’s North Slope and a gathering storm in the Atlantic are causing the current bull run.

In its weekly inventory report last week, the US Energy Information Administration said its crude stocks plunged by 7.1 million barrels. And despite staying at average levels, these were below last year.

With the winter heating season approaching fast, crude demand by the refiners is bound to stay firm in the months ahead. The belligerent statement from the French foreign minister on Iran has also not helped soothe the crude markets.

The declining value of the US dollar, which oil is priced in, is also putting upward pressure on oil prices. And this becomes more pronounced when speculators are in the fray too. This year alone, an estimated $100 billion was put into commodities funds by everyone, from hedge funds to state pension plans.

The London based Centre for Global Energy Studies (CGES) appears apprehensive, arguing in its monthly oil report (MOR) that the discounts against benchmark crude grades for heavy, sour Middle Eastern crude oil have not been sufficiently wide to make these grades attractive to owners of simple, hydroskimming refineries, but it is precisely some of these refineries that make up the world’s spare processing capacity.

The report then goes on to argue “this means for the Opec the need to either produce more light oil, or increase significantly the discounts for heavy grades when setting price formulae for the coming months.

The additional Opec crude to be made available from November would reach markets by beginning 2008 only. The promised increase in output will do nothing to slow the rise in oil prices until at least the middle of next year, by which time they could be well on their way to $100, CGES says.

Goldman Sachs has also lifted its crude price projection to $85 a barrel by the end of the year, saying crude could climb as high as $90 due to tight supplies. Their estimate is $13 higher than its previous forecast. Goldman forecast prices to rise as high as $95 by the end of next year.

However, in the longer term, prospects appear different. The CGES maintains, “it is looking more likely that the current financial troubles, that were spawned in the US sub-prime mortgage market, may yet infect the ‘real’ economy and lead to a loss of confidence among US consumers, triggering a slowdown in the US economy and a consequent contraction in China’s exports.”

The CGES thus suggests that in the short term oil prices may continue to rise. In case of oil demand growth of 1.4 per cent in 2007, with strong non-Opec output, strengthening slightly to 1.6 per cent in 2008, as per the Opec demand forecast, the price of Dated Brent would continue its upward path averaging $94.5 in the second quarter of 2008, before easing back to $78 in the final quarter of the year.

But before this could happen oil demand growth would collapse bringing prices down with a bump. And this is what the Opec is extremely concerned with. Algerian oil minister reminded Opec of the 1997 Jakarta meeting, when under global pressure, Opec had to boost output at a time the Asian economic melt down was just to begin. This led to a crude price slump to $10 a barrel.