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. Last Updated: 07/27/2016

Oil Prices Climb to Just Under $100

Global oil prices came within a hair's breadth of breaking through the psychologically important $100 per barrel barrier Wednesday, a level that would give Russia extra confidence to increase spending and attract more foreign investors.

West Texas Intermediate crude oil reached as high as $98.62 per barrel before falling back after a smaller-than-expected supply drop in the United States. The surge toward $100 has been fueled by dollar weakness, bad weather and heightened risks in such oil-producing countries as Iran, Iraq and Nigeria.

In Russia, whose Urals blend of crude typically sells at a $7 discount to WTI, the soaring oil price, if it persists, could encourage potential foreign investors and prompt the government to further boost spending, said Clemens Grafe, chief economist at UBS.

"The higher oil price is giving the government the confidence to spend a bit more," he said.

The State Duma gave initial approval to amendments to the 2007 budget Wednesday that would increase this year's spending by 1.1 trillion rubles, including 640 billion rubles in funds to economic development institutions.

The country's dollar-denominated gross domestic product will rise sharply on the back of high oil prices, making it a bigger marketplace to invest in, Grafe said. "At higher oil prices, the confidence of investing in this country is obviously much higher," he said.

Gazprom, which has a lower tax and export duty burden than the country's oil companies, could be the biggest winner of the oil market situation because it ties the price of its gas to the price of oil products, said Timur Khairulin, an oil and gas analyst at Antanta Capital.

The question is how long the record highs will last.

"We find it very difficult to see the oil price declining from its current level," Grafe said.

The only significant production increase is coming from Kazakhstan and some African countries, but it is not enough to send the prices downward, he said. Soaring demand from India and China, where the governments subsidize oil consumption, is pushing the price still higher, he said.

Chinese and Indian oil imports will almost quadruple by 2030, the International Energy Agency said in a report Wednesday. China will replace the United States as the world's largest energy user early next decade, the agency said.

On the other hand, demand could fall if major Western economies slump next year as an indirect result of high oil prices, said Leo Drollas, chief economist at the Center for Global Energy Studies in London.

"It looks like we will have a slowdown, if not a recession, next year," he said. "High oil prices are inflationary. Fears of inflation ... lead to higher interest rates and higher interest rates affect growth."

If demand declines sharply in such countries as the United States, which is the largest oil importer, the current oil prices will only last for a month or so, Drollas said.

On the supply side, the Organization of the Petroleum Exporting Countries promised in September to raise output, starting in November, to steady prices.

Russian crude exporters would not be able to reap much benefit from the prices in the neighborhood of $100 because they have to pass three-quarters of their profits to the government in the form of export duties and other taxes.

LUKoil, the second largest oil producer, which paid 76.5 percent of last year's profits in those duties and taxes, said Wednesday that it did not anticipate much in the way of extra profits from the price jump.

"It's the stabilization fund that will have a serious increase in its income," a company spokesman said, referring to the government fund that accumulates the federal budget's crude export revenues.

If oil pushes beyond $100 per barrel, it will increase pressure on domestic inflation, Chris Weafer, chief strategist at UralSib, wrote in a note to investors Wednesday. Combined with the weaker dollar, it will start to squeeze profits among export earners, he said.

But Anton Struchenevsky, an economist at Troika Dialog, said the crude price played an insignificant role as a driver of inflation.

The longer-term reasons for the current high oil price include concerns about supply from Iran as fears grow of a military conflict with the West over its nuclear program. Civil war-torn Iraq, another major exporter, may descend into a new war with Turkey as Ankara considers whether to launch large-scale crossborder raids against Kurdish rebels based there.

These problems "cast a long shadow of anxiety and fear over the oil market," Cambridge Energy Research Associates, a U.S.-based industry consultancy, said in a statement Monday.

In addition, militants' attacks on oil rigs in Nigeria are ongoing, and the dollar is continuing its slide against other major currencies.

A short-term factor also sending prices higher is bad weather in oil-producing areas such as the Gulf of Mexico and Britain's North Sea.