Oil prices hit $40 a barrel on Friday for the first time since the 1990 Gulf War, kicking off what analysts said could be the costliest energy era yet, fuelled by turmoil in the oil-rich Middle East.
"Forty-dollar oil might be here for a while," said Bill O'Grady, analyst at A.G. Edwards in New York. "As long as there is the possibility of a terrorist attack against Saudi oil facilities, oil will have its fear-premium."
US crude prices first hit $40 on October 9, 1990, one day before striking the all-time high of $41.15. That was two months after Saddam Hussein's forces invaded Kuwait, and three months before a US-led coalition pushed them back out.
High oil prices this year have raised a red flag for economists worried that soaring energy costs, including record high retail gasoline prices in the United States, will hobble a global economic recovery.
Analysts said the $40 threshold breached Friday could be a gateway to some of the highest nominal oil prices ever seen, and is only partially justified by slim oil inventories and demand growth from the US and China.
"This is a mental condition that we're suffering from," said Tim Evans of IFR-Pegasus. "The only reason you'd pay $40 for a barrel of oil is if you believe it may go to $50 or $60. A well-implemented attack could achieve that," he added, referring to sabotage in an increasingly violent Middle East.
Some are already betting that crude with rise above $50 by summer with the number of call options - contracts allowing dealers to buy oil at that level - more than doubling since last week to 1,092 lots, according to NYMEX data.
"All you need is one person with a block of explosive in their lunchbox in a Saudi oil facility and we'd be in uncharted territory," said Adam Seminski of Deutsche Bank in London.
Attacks in recent weeks, including against a key oil terminal in southern Iraq and a chemicals plant in Saudi Arabia's industrial city of Yanbu, have heightened fears that militants could deal a severe blow to Mideast oil shipments.
Other analysts add that many of the other market trends that helped to fuel the rally in crude oil prices above $40 are still firmly in place, without signs of abating.