Oil prices anchor around $60

Oil rose slightly hovering just above the $60 mark trading in the Far East this morning. Prices could be expected to rise further as North Korea announced its first underground testing of a nuclear device. Although there are now immediate threats to energy supplies perceived by the test, there are concerns that the news may embolden Iran in its pursuit of nuclear options.

Iran’s President Mahmoud Ahmadinejad vowed to impose retaliatory sanctions on world powers if Iran is penalized by the United Nations Security Council over its nuclear program, state media reported.

Just over a week ago Nigeria and Venezuela cut production by around 170,000 barrels per day, but this had little or no impact on the price of oil, which shrugged off the news by dropping to a new 7 month low at $58.

It was only when the OPEC cartel announced its threat to reduce output by a full 1 million barrels per day that prices once again moved towards the $60 mark at the end of last week. There are, however some doubts as to whether OPEC will be able to enforce the drop as many members of the cartels governments have increased public spending and may not be able to sustain the short-term revenue losses.

At the same time many hedge funds are no rapidly getting out of positions that were based on continuing high oil prices. The leveraged gearing of these funds will potentially exasperate the drop in prices. Many of the funds have a large interdependency and many funds already have precarious positions in energy, both gas and oil.

The consensus seems to be that the price of oil will gradually move towards $50 per barrel towards the end of 2007, assuming no serious global events. It is also thought that $50 is the minimum marker point set by the Saudi’s, if prices fall below that point then they will look at more vigorous options to protect the price.