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Last updated: February 22, 2012 11:45 pm
Oil prices have soared to a record high in sterling terms and are approaching euro highs, raising fears that European countries struggling with heavy debts will face further barriers to economic recovery.
“This is a regional oil shock,” said Amrita Sen, commodities analyst at Barclays Capital in London.
The rally in the price of crude denominated in the two major European currencies is likely to push up the imported cost of oil. It may undermine growth as well as demand for refined oil products, analysts said.
Alan Clarke, economist at Scotia Bank in London, said the price jump, on the back of tension with Iran, was “not welcome”, adding: “It may well dampen the [UK] recovery that we were hoping for this year.”
Brent rallied to £78.48 a barrel, passing the previous all-time high of £77.71 a barrel set in April last year at the peak of the Libyan civil war supply disruption. In euro terms, the oil benchmark reached a three-year high of €92.70 a barrel, a fraction below the peak of €93.50 a barrel set in July 2008.
The price of the commodity remains well below its record in US dollars. ICE April Brent is at a nine-month high of $122.72 a barrel, far from the peak of almost $150 that was set in July 2008.
Economists said the rise in oil prices would eat into corporate profitability as well as the ability of consumers to spend. It would also put upward pressure on inflation, and limit the scope for further monetary easing. In Europe, the European Central Bank has tended to be far more sensitive to inflation, and any rise in consumer prices would reduce the likelihood of further ECB rate cuts, said Mr Clarke.
Although politicians have not focused on the oil price in Europe as much as their American counterparts, analysts said it was set to become a leading political issue if prices rose further.
The oil price spike in euros is “going to be a political challenge for politicians in the west running for re-election,” said Olivier Jakob at Petromatrix, the oil consultancy based in Zug, Switzerland.
Official data show deep drops in year-on-year consumption in European countries such as Italy, in January. The International Energy Agency, the western countries’ oil watchdog, forecasts that Europe’s richest countries will witness the largest drop in oil consumption of any region, contracting by 340,000 barrels a day, following a drop of 290,000 b/d last year.
Wesnesday’s jump in oil prices came amid heightened fears about further tensions surrounding Iran after the International Atomic Energy Agency reported that it held a “disappointing” meeting with Tehran over the country’s nuclear programme.
Sterling-denominated Brent was also boosted by the fall in the pound against the US dollar on expectations of further monetary easing after the publication of the minutes of the last meeting of the Bank of England, which showed that some members of its Monetary Policy Committee voted for more quantitative easing. The pound fell against the dollar to $1.5666 after the publication of the minutes.
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