Terrorist attacks, falling US stocks hike crude prices

Sam Fletcher
Senior Writer

HOUSTON, Dec. 30 -- Energy prices continued to climb Dec. 29 as traders were surprised by a bullish weekly report of declining commercial inventories of crude in the US.

Two coordinated explosions that same day in Riyadh, the capital of Saudi Arabia, also rekindled traders' fears that terrorist attacks could disrupt supplies of Middle Eastern crude. According to reports, one person was killed when a car bomb exploded near the Saudi Arabian Interior Ministry, while a second car bomb was detonated in a street after its driver was unable to ram a military building.

"Earlier in the day, Saudi authorities had arrested two militants and killed another in a gun battle. It is unclear whether there was any connection between these events and the blasts. However, after the blasts, Saudi forces responded swiftly, raiding a house in Riyadh," said analysts Dec. 30 in the Houston office of Raymond James & Associates Inc.

"There have been many terrorist attacks in Saudi Arabia in the past year, most recently on Dec. 6 against the US consulate in Jeddah," the analysts reported. Al-Qaeda head Osama bin Laden subsequently called for terrorist attacks on Middle Eastern oil infrastructure (OGJ Online, Dec. 20, 2004). "While none of the Saudi attacks this year caused actual supply disruptions (as is continually the case in Iraq), the market is understandably worried about potential future sabotage against oil infrastructure," analysts said. They also noted, "Saudi oil infrastructure is among the most highly guarded in the world, so a major attack against production facilities or export terminals is very unlikely—indeed, it would be unprecedented."

In Abu Dhabi, UAE economic analyst Mohammad Al Asoomi noted that members of the Organization of Petroleum Exporting Countries increased their crude production by 20% in 2004 to prevent oil prices from soaring even higher. "OPEC, however, must now move in a different direction. It will need to use production cuts to return to the agreed output quotas in effect before the recent extraordinary price increases," he said.

Still, Al Assomi said, "Middle East producers must raise production capacity in the next few years to meet the world's growing demand for oil and its byproducts. During the last 5 years, there have been no significant oil discoveries in the Middle East. This comes at a time when countries are becoming increasingly dependent on the [Persian] Gulf region for their oil needs."

Meanwhile, the Energy Information Administration said commercial US crude stocks fell by 800,000 bbl to 295.1 million bbl during the week ended Dec. 24, vs. Wall Street analysts' consensus expectations of a 200,000 bbl build (OGJ Online, Dec. 29, 2004). Distillate fuel inventories also fell by 800,000 bbl, to 119.1 million bbl in the same period. US gasoline stocks increased by 900,000 bbl to 212.3 million bbl.

Energy prices
The February contract for benchmark US sweet, light crudes increased by $1.87 to $43.64/bbl Dec. 29 on the New York Mercantile Exchange, while the March contract gained $1.79 to $43.80/bbl. On the US spot market, West Texas Intermediate was up by $1.87 to $43.65/bbl.

Heating oil for January delivery jumped by 5.53¢ to $1.28/gal on NYMEX. Gasoline for the same month gained 3.86¢ to $1.08/gal. The February natural gas contract inched up by 6.1¢ to $6.40/MMbtu, "as mild weather and a weaker cash [spot gas] market were offset by higher crude oil prices and short-covering [of exposed sales contracts] when downside momentum quickly stalled early," said analysts at Enerfax Daily. "The market was vulnerable to a short-covering rally since [speculative investment] funds increased their net short futures positions," they said.

EIA reported the withdrawal of 178 bcf of natural gas from US underground storage during the week ended Dec. 24. That compares with withdrawals of 123 bcf the previous week and 80 bcf during the same period a year ago. US gas storage now exceeds 2.8 tcf, up by 230 bcf from year-ago levels and 358 bcf above the 5-year average.

The February contract for North Sea Brent crude lost 90¢ to $39.17/bbl in London as the International Petroleum Exchange resumed trade Dec. 29 after an extended holiday.

The average price for OPEC's basket of seven benchmark crudes increased by 73¢ to $35.54/bbl on Dec. 29.

NYMEX closed early Dec. 30 and will remained closed Dec. 31 in observance of the New Year's holiday in the US.

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