Oil Rises Above $86 to a Record on Turkey-Iraq Border Tension

By Mark Shenk

Oct. 15 (Bloomberg) -- Crude oil rose above $86 a barrel for the first time in New York on concern Turkish forces may pursue Kurdish militants in Iraq, curbing shipments as refiners prepare for the peak-demand heating season.

Prices climbed as much as 3 percent because Turkey's military may attack Kurdish bases in Iraq, which has the world's third-largest oil reserves. Futures also increased after the Organization of Petroleum Exporting Countries said production outside the group will be lower than previously forecast.

``Everything imaginable is going wrong as far as the oil market is concerned,'' said Robert Ebel, chairman of the energy program at the Center for Strategic and International Studies in Washington. ``Turkey is saber rattling, Iraq isn't calming down, Iran is also saber rattling and supplies are tight.''

Crude oil for November delivery rose $2.44, or 2.9 percent, to settle at a record $86.13 a barrel at 2:54 p.m. on the New York Mercantile Exchange. Oil reached $86.22, the highest since the contract was introduced in 1983. This is the fifth straight rise. Prices are 47 percent higher than a year ago.

Today's intraday high passed the previous all-time inflation-adjusted record reached in 1981 when Iran cut oil exports. The cost of oil used by U.S. refiners averaged $37.48 a barrel in March 1981, according to the Energy Department, or $84.73 in today's dollars.

Citigroup Inc., Deutsche Bank AG and HSBC Holdings Plc have predicted over the past month that oil prices would decline because of falling gasoline demand and a slowing U.S. economy. Oil may end the year below $70 a barrel, forecast Adam Sieminski, the global oil analyst at Deutsche Bank in New York.

New Legislation

Turkey's government will ask lawmakers to approve legislation to launch attacks on bases of the Kurdistan Workers' Party, or PKK. The resolution, which requires the backing of a simple majority of legislators in Turkey's 550-seat parliament, is also supported by the main opposition parties.

``The market is looking for any excuse to move higher right now,'' said Brad Samples, commodity analyst for Summit Energy Services Inc. in Louisville, Kentucky. ``Eventually this speculative move will exhaust itself because the fundamentals don't justify these prices. There's plenty of supply.''

Crude-oil and other commodities also rose because the U.S. dollar declined against the euro, enhancing their appeal as an investment. Commodities often move in the opposite direction of the U.S. currency. A lower dollar makes oil relatively cheaper in the countries using other currencies.

U.S. Complaints

``You don't hear a lot of complaining about high prices except in the U.S.,'' Ebel said. ``The rise in prices is a lot less impressive in other currencies.''

In U.S. dollars, West Texas Intermediate, the New York- traded crude-oil benchmark, is up 41 percent so far this year. Oil is up 31 percent in euros, 35 percent in British pounds and 39 percent in yen. Oil reached a record against the euro on July 17, 2006, when Israel struck targets in Lebanon, raising the prospect of a halt in Middle East shipments.

``It's going to soon hit $90 and go north of $100 next year,'' said Peter Schiff, chief executive officer of Darien, Connecticut-based brokerage Euro Pacific Capital, with $700 million in customer accounts. ``We should see $150 to $200 oil in the next two to three years because of the drop in the dollar. Once Asian countries allow their currencies to appreciate, demand will explode there.''

Brent crude oil for November settlement rose $2.20, or 2.7 percent, to close at a record $82.75 a barrel on the London-based ICE Futures Europe exchange. Brent reached $82.90, the highest since trading began in 1988.

The Euro gained against the dollar today on speculation quickening inflation will prompt the European Central Bank to keep raising interest rates. The U.S. Federal Reserve cut its benchmark rate by a half percentage point to 4.75 percent on Sept. 18 because of an increase in short-term borrowing costs.

Money Flow

``We are seeing the effects of the Fed lowering rates when it didn't need to,'' said Bill O'Grady, director of fundamental futures research at A.G. Edwards & Sons in St. Louis. ``Bonds and the U.S. currency have fallen while commodities and foreign currencies have become more attractive. There's been a steady flow of money into these markets since the cut.''

OPEC members have said a falling dollar justified higher prices because oil-producing countries sell oil in dollars and often buy goods in euros. OPEC will discuss the impact of the falling dollar when members meet on Dec. 5, Algerian Oil Minister Chakib Khelil said today.

``Oil exporters are losing a lot of money because of the weak dollar,'' Khelil told national public radio in Algiers. Rising oil prices are helping Algeria recoup losses from the falling value of the U.S. currency, he said.

OPEC said today that non-OPEC supply will average 50.29 million barrels a day this year, down 28,000 barrels from last month's estimate.

Heating oil for November delivery increased 6.08 cents, or 2.7 percent, to close at a record $2.3072 a gallon in New York. Futures touched $2.311, a record intraday price.

Last Updated: October 15, 2007 16:05 EDT