No end in sight for high oil prices

But last week was a strange one in oil markets. The market struggled to force oil prices down amid mounting upward pressure and, with great difficultly, managed to contain US light crude at below $40 a barrel.

By the close of the week Iraq expected to restore 500-600,000 bpd of its stalled export flow. But this begs the question, how long before sabotage shuts it down again? Nobody is terribly impressed by the claims of security chiefs in Iraq these days; action does not necessarily follow words.

Then the Norwegian oil workers called a strike, knocking out 400,000 bpd after talks with their employers collapsed. Who will be next? Nigerian oil workers? The unhappy Venezuelans?

The problem is that once the players in the oil market, and this means the oilmen and not the oil traders, know that the market is in short supply, and prices are high, they will want a bigger slice of the pie. Why should all that extra money go to the oil companies?

And the real supply situation is pretty desperate. Opec is pumping at near capacity and the demand for oil is the strongest seen in over two decades due to Chinese expansion and a global recovery fuelled by very low interest rates.

Now after Opec's raising of production by two million barrels per day for July, and 500,000 bpd for August, there will be almost zero Opec spare capacity to meet any supply side shocks.

It is already apparent that this does not necessarily need to be caused by more violence in the Middle East. Militant action by Norwegian oilmen would be quite enough. How ironic that the oil market could be finally upset by action in one of the world's most peaceful nations, thousands of miles from Iraq.

So the stage looks set for another oil price hike well above $40 per barrel, even if the oil markets are currently in a state of denial.

The only way that the oil market could be seriously cooled down is by a coordinated round of global interest rate rises to reign in the economic recovery.

Indeed, the usual end to high oil prices is a global recession. But there is no sign of that yet, nor will there be until after the US presidential election in November.