Crude oil prices seen capped at $80/bbl

Crude oil prices are seen staying at high levels on supply concerns owing to rising hurricane activity in the Gulf of Mexico, but the upside is seen capped at $80 a barrel, analysts said.

"Crude oil as a commodity has become highly news driven and volatile. Any news that there is a threat to supplies from the Gulf of Mexico could see prices breach $78 and even break the all-time high of $78.77 a barrel in the next one month," Anunay Garg, research analyst, Religare Commodities said. However, according to Avinash Raheja, senior vice-president, Commtrenz Risk Management Services, oil prices are unlikely to be really affected by the hurricane threat unless it actually hits refineries and curtails utilisation in the Gulf of Mexico.

The US National Oceanic and Atmospheric Administration had forecast that the 2007 Atlantic hurricane season (June-November) would be "above-normal" in its May 22 outlook. The US body has predicted a 85 per cent chance of an above-normal season, and said there will be 13 to 17 named storms, with seven to nine likely to develop into hurricanes, of which, three to five could become major ones.

"Above-normal hurricane activity in the Atlantic is likely to correspond to increased impacts on offshore crude oil and natural gas producers in the Gulf of Mexico," US Energy Information Administration said.

EIA estimates that supply of about 13.2 million barrels of crude oil and 86.5 billion cu ft natural gas will be disrupted as a result of this year's hurricane season.

With hurricane season expected to touch its peak Monday, and Colorado State University forecasting four more severe hurricanes, it is likely that oil prices will remain firm and even rise further in the coming weeks, an IL&FS Investsmart Commodities analyst said.

"Even if there is a major hurricane, the rise in oil prices will be capped at $80 a barrel as traders have already built in a risk premium of $4-5 a barrel for hurricane-related disrupted," Harish Galipelli, head of research, Karvy Comtrade said.

But, Galipelli says that once the hurricane season eases, oil prices are likely to fall to $65 a barrel, as current prices are just not sustainable and will hamper crude demand in the long run. "Oil traders have factored in a risk premium of $2-3 a barrel at the moment, but any indication of supply problems due to hurricanes can lead to prices surging till $78-80 a barrel," a research analyst with MF Global said.

Oil prices have already breached all key technical levels in its surge to rise above $75 a barrel and are now likely to eye all-time highs as traders continue to be wary of a repeat of the supply shocks of 2005, analysts said.

In 2005, crude oil prices rose 24% to $72 a barrel, as five major hurricanes hit the Gulf of Mexico, one of the world's largest production region, thus impacting crude oil and natural gas production.

The same year, hurricanes Katrina and Rita caused a production loss of nearly 155 million barrels of crude oil and 750 billion cu ft natural gas from the offshore fields in the Gulf of Mexico.

This amounts to about 28% and 21%, respectively, of a normal year's crude oil and natural gas production in the US.