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Market watch: Venezuela and Iraq continue to boost oil prices

By OGJ editors

HOUSTON, Dec. 27 -- Futures prices for oil and petroleum products continued to rise Thursday on the New York Mercantile Exchange as the general strike in Venezuela raged on, and US and UK forces struck military targets in Iraq.

US and UK aircraft bombed military positions in southern Iraq in reprisal for the downing Monday of a US unmanned surveillance aircraft by Iraqi forces.

The February contract for benchmark US light, sweet crudes gained 52¢ to $32.42/bbl on NYMEX, the highest closing price for a front-month contract since late November 2000. Oil prices have increased more than 20% since the general strike to oust Venezuelan President Hugo Chávez began Dec. 2.

The oil market "still has upwards momentum," Paul Horsnell, JP Morgan Chase & Co., London, reported Friday. "We are in the middle of a fairly ferocious energy price spike," he said. "On the one hand, everybody knows that prices are unsustainable at current levels. On the other hand, nobody knows how high the peak of the spike will be or when it will occur, and under these circumstances only the very brave or the foolhardy would want to run any significant short position."

The price spike could be blunted by Petroleos de Venezuela SA (PDVSA) resuming normal operations or by the release of oil from the US Strategic Petroleum Reserves. "However, the application of either of these brakes does not look particularly imminent," said Horsnell.

With 90% of PDVSA employees participating in the strike, the national company's oil production has fallen to less than 200,000 b/d from around 3 million b/d previously. "The overall supply loss from Venezuela looks like about 70 million bbl, and the final total should easily clear 100 million bbl," Horsnell said.

"The longer the Venezuelan disruption continues, the longer it will take to restore operations and the more likely it is that capacity will have been permanently impaired," he said. "Venezuela has over 14,000 oil wells. Some of those wells, particularly in the older fields, are highly unlikely to return to their pre-strike production levels due to falling reservoir pressures."

The March contract for benchmark US oil also increased Thursday, up 50¢ to $31.53/bbl. Heating oil for January delivery rose 0.42¢ to 90.91¢/gal, the highest level in 2 years, on NYMEX. Unleaded gasoline for the same month was up 0.2¢ to 92.97¢/gal.

"With New York having had its whitest Christmas since 1909 and with the weather still cold, the pressure remains on the heating oil market," said Horsnell.

However, the January natural gas contract dropped 18.4¢ to $4.97/Mcf on NYMEX. "The market opened lower and dipped below $5(/Mcf) by midmorning, breaking through support early in trading and continuing lower throughout most of the day, before closing on an small upswing," said analysts Friday at the Enerfax Daily. "Volume in the cash market was thin because deals were done before Christmas for supplies needed the rest of the month. Futures traders with long positions in the soon-expiring January contract sold off quickly as prices dropped early. Options expiration yesterday also probably helped push prices lower."

The US Energy Information Agency reported Friday that 95 bcf of gas was withdrawn from underground storage during the week ended Dec. 20, down from 159 bcf the previous week but up from 80 bcf during the same period last year. US gas storage now stands at 2.5 tcf, down 575 bcf from year-ago levels and 128 bcf below the 5-year average.

The American Petroleum Institute also reported US inventories of crude increased last week by 2.7 million bbl to 286.6 million bbl. However, that increase was largely the result of an inventory build on the US West Coast.

"On the Gulf Coast, the area most affected by the Venezuelan shut-in, inventories fell by 3 million bbl," said Horsnell. "However, the fall in recorded imports is far less than would have been expected. We suspect that the failure of the strike to show up significantly so far has more to do with the nature and inherent volatility of weekly data than it does with the reality of the market situation. We would expect the data to catch up with that situation in coming weeks."

US oil imports fell by 605,000 b/d to 8.8 million b/d. Imports of refined products increased by 536,000 b/d to 2.9 million b/d.

API also reported US distillate stocks increased by 1.4 million bbl to 125.5 million bbl last week. However, gasoline inventories declined by 649,000 bbl to 204.9 million bbl. US refineries were operating at 88.7% capacity last week, down from 89.2% the previous week.

Horsnell reported, "November was the second lowest month for US crude oil production in the last 50 years. September of this year was the lowest, October the third lowest."
Both the API and the EIA reports were delayed because of the Christmas holiday this week.

The International Petroleum Exchange in London was closed Thursday for a public holiday.

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