LONDON: Since the price of oil began its rocky but seem­ingly inex­orable climb above $40 a bar­rel in 2003, there has been wide­spread debate about what is dri­ving it.

Crude bears have con­tended higher energy prices are heav­ily influ­enced by a “risk pre­mium” amid fears of ter­ror­ist or polit­i­cal dis­rup­tions to sup­ply. Bulls, con­versely, acknowl­edge a pre­mium, but say it is far less impor­tant than the soar­ing demand from devel­oped and devel­op­ing coun­tries amid ever-tightening sup­ply. So far, the bears have been pun­ished might­ily, while the bulls have been among the best-compensated investors in the world.

“Clearly, there is some risk pre­mium,” said James Melcher, man­ager of Balestra Cap­i­tal, a New York-based hedge fund that has notched up strong returns in recent years in part thanks to energy related bets. “If the Israeli-Palestinian mess sim­mers down, Venezuela set­tles down and the Iran sit­u­a­tion pro­gresses in a benign way, I think oil will come down to maybe $55 or $60 — but it isn’t going back to the $40s.”

There has been no short­age of events to fuel the fear fac­tor. Notwith­stand­ing the failed attack on Saudi Arabia’s Abqaiq facil­ity, Niger­ian mil­i­tants closed sig­nif­i­cant parts of the country’s pro­duc­tion early this year. There are the con­tin­ued attacks on Iraqi oil infra­struc­ture and the nuclear stand-off con­tin­ues between Iran and the west. All of which have kept oil traders busy, and stoked con­cerns about future oil sup­plies, which has helped push oil prices to more than $70 a bar­rel this week.

For hedge fund man­agers such as Mr Melcher, there are plenty of ways to profit from higher energy prices with­out a direct invest­ment in crude.

For instance, Balestra has 80 per cent of its energy hold­ings in oil ser­vice com­pa­nies. “With prices at higher lev­els, mar­gins for these com­pa­nies are explod­ing,” said Mr Melcher.

But geopol­i­tics is just one of sev­eral fac­tors affect­ing oil prices. More mun­dane ones include oil demand, the level of oil inven­to­ries, and refin­ing con­straints. Fran­cisco Blanch, head of com­mod­ity research at Mer­rill Lynch, says that a closer look at the oil mar­ket shows that oil sup­plies have not been dis­turbed to any great extent. In fact oil held in stor­age in devel­oped coun­tries is at its high­est level in more than 20 years, even higher than in 1998, when big inven­to­ries con­tributed to the oil price falling to $10 a barrel.

More­over, Iraqi oil exports this month are expected to rise to their high­est level since Octo­ber 2004, as oil from the north­ern Kirkuk oil field starts to flow again for the first time since Sep­tem­ber. The shut­down of about 500,000 bar­rels a day of Niger­ian pro­duc­tion by rebels has been par­tially off­set by pro­duc­tion from the new Bonga field.

“I think the geopo­lit­i­cal sit­u­a­tion is prob­a­bly a bit bet­ter than the gen­eral per­cep­tion,” said Mr Blanch. Even the like­li­hood of Iran using oil as a strate­gic weapon in its nuclear nego­ti­a­tions is remote, he adds, given that the coun­try is actu­ally depen­dent on for­eign imports of petrol as a result of insuf­fi­cient refin­ing capacity.