Petrobras CEO: Low Interest Rates Fueling Volatile Oil Prices

Record-high crude oil prices are being fueled by volatility stemming from geopolitical concerns and low interest rates prompted by the financial crisis in the credit markets, the head of Petroleo Brasileiro SA (PBR), the state-controlled Brazilian oil company, said Thursday.

"We're seeing very high volatility in the market. The main reasons are not the fundamentals but the environment in which" oil is being traded, Petrobras Chief Executive Jose Sergio Gabrielli de Azevedo said at a press briefing in London.

He said low interest rates and a crisis in the financial markets generally lead to higher volatility in the oil markets.

Nymex light sweet crude oil almost touched $106 a barrel Thursday before closing at $105.50 a barrel, up 98 cents from Wednesday's close. Oil has been moving in ranges of several dollars a day recently. On Thursday alone, oil traded in a range of about $3.

"I don't see why on fundamentals we should forecast an increase or fall in prices" at the moment, Gabrielli said.

He said that oil supply is expected to grow at a rate of 1.6% to 2.5% annually over the next couple of years, while demand is expected to grow at about 2.4% during the same period.

Gabrielli said high project costs are providing a floor price for crude oil. Downstream project costs such as those for steel, copper and mechanical structure are still rising, but upstream project costs, such as those for drilling, rig rentals, subsea systems, compressors and flexible risers are showing signs of reaching a plateau. He said upstream equipment deliveries are being delayed, but it hasn't led to higher contract prices.

A weaker dollar also has contributed to higher oil prices, Gabrielli said. The dollar has weakened so much against the Brazilian real that Gabrielli said: "We're seeing a growing (desire for Petrobras) contracts in reals rather than dollars."

Petrobras manages 55,000 contracts, but Gabrielli wasn't able to say how many of those contracts are real-denominated rather than dollar-denominated.

Gabrielli said he doesn't expect consumers will cringe at higher oil prices.

"The share of household budget spent on oil products is much smaller (than it used to be.) They're willing to accept higher prices," he said.

Copyright (c) 2008 Dow Jones & Company, Inc.


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