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Markets & Stocks

Oil sets yet another record
Supply fears over Yukos, which can't use bank accounts to sustain production, are fueling the run.
August 5, 2004: 4:40 PM EDT

NEW YORK (CNN/Money) - Oil reached another record high at midday Thursday as traders priced in potential supply disruptions on news Russian oil giant Yukos can't use its bank accounts to keep production flowing.

U.S. light crude was trading erratically on the New York Mercantile Exchange, hitting $44.50 a barrel before settling at $44.41, a gain of $1.58. Brent crude trading in London also hit a record high of $41.30 before settling at $40.13 a rise of $1.43.

The record prices came after Russia's Justice Ministry revoked permission for troubled oil company Yukos to use its bank accounts to finance daily operations and pay transport fees to ensure oil exports.

Russia's Justice Ministry said on Thursday that permission granted by one bailiff, sent to Yukos only on Wednesday and made public by the oil firm, was illegal and therefore withdrawn. The company has been battling bankruptcy, with tax debts of $3.4 billion.

"All financial means entering the company's accounts, now and in future, will be seized by the bailiffs' service and transferred to the budget to pay the tax debt," the ministry said in a statement.

Yukos had announced on Wednesday that bailiffs had allowed it access to its cash reserves to ensure short-term exports, thus helping knock prices off highs in the previous session.

Many analysts believe the trouble over Yukos is politically motivated by a Russian government that enjoys the increase in foreign reserves and will eventually strangle the company to further drive up oil and then make a killing on contract awards to Western oil companies.

"(Russian President Vladimir) Putin wants to break up the company," said Fadel Gheit, a senior energy analyst with Oppenheimer. "Putin owns the cow. Exxon is interested in the meat. They are waiting for Putin to slaughter it so they can eat."

"The Russian government is playing games with all the excess capacity in the world," said Phil Flynn, a senior market analyst at Alaron Trading in Chicago. "Apparently, Vladimir Putin wants to show his might -- that Russia is back and a major force in world oil markets."

Fears have grown that a major glitch could arise in the supply chain, just at a time when energy demand is growing at the fastest pace in more than two decades and Asian economies continue to consume more and more oil. OPEC production is already running near the highest level since 1979.

Security concerns in Saudi Arabia and Iraq, as well as uncertainty in Venezuela and Nigeria have sparked fears of inadequate supply. This has attracted speculative fund investors, who are partly seen as responsible for oil's relentless rise this year.

"It will take a lot of time for this extra oil to be delivered by OPEC," said Christopher Bellew of Prudential Bache brokerage in London. "The fears people had about supply interruptions still remain because of the instability in Saudi Arabia and Iraq."  Top of page

--from staff and wire reports

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