By Jane Merriman
Oil struck a record high of more than $118 on Tuesday, boosted by a jump in oil demand last month from China, the world's second-biggest energy consumer, and worries about supply from key producers Russia and Nigeria. U.S. light crude for May delivery was up 84 cents at $118.32 a barrel by 10:18 a.m. EDT, near an all-time peak of $118.45 hit earlier. London Brent crude was up 93 cents at $115.36 a barrel, after rising to a record peak of $115.53.
Oil has hit a string of record highs this month, driven by booming demand from emerging markets such as China that has coincided with long-term supply constraints.
A weak U.S. dollar has also played a part in boosting the price of dollar-denominated commodities like oil and also attracted speculative inflows from hedge funds.
"Every time the market does make new highs, it suggests that the upward trend is still intact and that provides a catalyst for the funds to keep buying it," said Tony Machacek of Bache Commodities Ltd.
China's oil demand leapt 8 percent in March from a year ago, the fastest rate in 19 months as refiners boosted imports ahead of the Olympics..
But the high cost of producing more oil plus political constraints on new supplies mean the market looks set to struggle to keep pace with growing emerging market demand.
"The news that Russia, the largest non-OPEC producer, will produce less this year than the year before and Nigeria's output may be set to fall because of lack of investment makes people realize high prices are justified," said Bob Greer, executive vice president at commodity fund manager PIMCO.
"The 5 year forward contract has gone above $100," he said, referring to a surge in long-dated oil prices.
From 2010 to 2016, for example, oil prices currently range from around $106 to nearly $108 a barrel.
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Long-term drivers for investment in the oil market include tight spare capacity, slow output growth from non-OPEC producers and robust demand from emerging economies. This is more than compensating for declining demand from industrial countries.
"Limited capacity along the entire supply chain is the real source of current global supply tightness," Saudi Arabia's Oil Minister Ali al-Naimi said on Tuesday.
Shortages of labor, equipment and materials were raising costs and delaying new projects that would boost capacity, he said in a speech to the International Energy Forum in Rome.
Against this backdrop, the market is sensitive to any events that could threaten supply.
Pipeline attacks in OPEC member Nigeria last week shut 169,000 barrels per day (bpd) of Bonny Light production, forcing Royal Dutch Shell Plc to declare force majeure on crude oil exports.
Nigerian rebels also attacked two Shell oil pipelines in the Niger Delta on Monday.
An oil refinery at Grangemouth in Scotland has begun shutting down ahead of a two-day strike due to start on Sunday. Some North Sea oil and natural gas output will have to be shut in if the strike halts the refinery.
The Organization of the Petroleum Exporting Countries has insisted the market has enough oil and shunned calls from consumer nations to pump more crude. //Reuters
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