Oil higher on Nigeria supply disruptions and cold US weather

LONDON (Thomson Financial) - Oil was up in London as supply disruptions in Nigeria and colder weather in the US gave prices a boost.

"On Thursday, Royal Dutch Shell announced that it was halting 130,000 bpd of production in Nigeria due to pipeline leaks," said analysts at Barclays Capital. "In addition, US weather forecasts indicated that temperatures in the North East would fall below normal next week leading to speculation that US demand would rise in response."

They cautioned however that gains have been capped by fears of a looming recession in the US and seasonally lower demand in Q2 of the year, which could yet see prices move further away from the highs.

At 12.38 pm, New York's WTI crude for March delivery was up 59 cents at 88.70 usd per barrel. Yesterday, prices dipped as low as 86.24 usd following a massive rise in US crude stocks the previous day, and lingering recession fears.

In London, Brent crude for March delivery was up 58 cents at 89.09 usd per barrel.

Shell said Thursday it would not be able to honour all its export contracts from its southern Nigerian Bonny export terminal for the rest of February and March because of sabotage.

Militant activity in the crude rich Niger Delta region has slashed around a quarter of production in Africa's largest oil exporter since January 2006. Shell's activities in the country account for around half of Nigeria's 2.6 mln bpd at peak production.

The oil giant has declared a force majeure, which allows companies to suspend contractual obligations such as deliveries of oil and gas following unforeseen events without incurring penalties.

While supply fears are boosting oil today, rising crude inventories in the US and fears demand could fall should the global economy falter have seen prices decline by almost 12 pct since briefly breaching the 100 usd mark in early January.

The dollar has also regained some strength, which could prove bearish for crude and other commodities priced in the US currency, as they become more expensive for overseas investors.

"The Dollar Index continues to gain and should stay under watch for any development of a rebounding trend," said Petromatrix analyst Olivier Jakob. The dollar has firmed against the euro as market watchers expect the European Central Bank to soon start cutting rates in response to the economic slowdown.

The dollar's fall to a series of all time lows, due to economic fears and rapid Federal Reserve rate cuts, has been consistently flagged as one of the key reasons for oil's rally up to its recent highs.

Higher than expected OPEC production is also weighing on prices. On Wednesday, OPEC Secretary General Abdalla El-Badri indicated production had risen slightly in January, despite the cartel holding production quotas steady at its last two meetings.

"On the supply side of the market, rising OPEC production has been widely dismissed in bullish circles, but has ultimately proven to have a calming influence on prices," said Citigroup analyst Tim Evans, adding that he saw the market having a supply surplus in the second quarter of the year.