MARKET WATCH
Supply worries boost energy prices

Sam Fletcher
Senior Writer

HOUSTON, Jan. 30 -- Energy prices climbed Jan. 27 as traders shrugged off earlier bearish reports of US inventories to position themselves ahead of the weekend for possible disruptions of crude supplies.

"Despite a surprise build in US gasoline and product inventories last week, which was more of a bearish outcome than the unanticipated drop in crude inventories, supply concerns due largely to the nuclear stand-off with Iran and to a lesser extent the violence in Nigeria continued to lend significant support to oil prices," said Robert S. Morris at Banc of America Securities LLC, New York. "Also, the unanticipated victory by the Palestinian terrorist group Hamas only added to tensions in the Middle East."

Escalation of the nuclear dispute with Iran involving the US and Europe has "substantially increased the odds of a meaningful oil supply interruption" in the next 2 years, said analysts at Raymond James & Associates Inc., St. Petersburg, Fla.

In a Jan. 30 report, Morris noted two key meetings this week. The first is the scheduled Jan. 31 meeting of ministers of the Organization of Petroleum Exporting Countries in Vienna. Based on previous statements by several of those ministers, markets already assume OPEC will not increase its production in the second quarter with prices now above $60/bbl and continued geopolitical tensions.

Moreover, the International Atomic Energy Agency, the United Nations' nuclear watchdog, is to meet Feb. 2-3. "The US has insisted that Iran be referred to the UN Security Council for possible sanctions while Iran's weapon of last resort is [possible curtailment of] its 2.4 million b/d of crude oil output if the UN were to impose sanctions, which both China and Russia still oppose," said Morris.

Industry sources said OPEC production was unchanged at 29.6 million b/d in January compared with revised figures for December. Royal Dutch Shell PLC earlier this month shut in production of 221,000 b/d of crude because of attacks by militants on its facilities in Nigeria (OGJ Online, Jan. 25, 2006). Saudi Arabia made up some of that loss, sources said. Meanwhile, there were reports that four workers kidnapped by militants from Shell facilities in Nigeria may be freed soon.

Energy prices
The March contract for benchmark US light, sweet crudes climbed by $1.50 to $67.76/bbl Jan. 27 on the New York Mercantile Exchange. The April contract increased by $1.53 to $68.52/bbl. On the US spot market, West Texas Intermediate at Cushing, Okla., was up by $1.53 to $67.77/bbl. However, if oil prices fall 10-20% from current levels over the coming months, "there is a strong possibility that energy stocks get pulled down with oil," warned Raymond James analysts.

Gasoline for February delivery escalated by 5.21¢ to $1.74/gal on NYMEX. Heating oil for the same month increased by 2.89¢ to $1.81/gal. The February contract for natural gas gained 17.1¢ to $8.40/MMbtu. "Falling oil prices could put further pressure on gas prices that are already depressed due to unfavorable weather," said Raymond James.

In London, the March contract for North Sea Brent crude increased by $1.32 to $66.24/bbl on the International Petroleum Exchange. The February gas oil contract gained $4.75 to $554.50/tonne.

The average price for OPEC's basket of 11 benchmark crudes increased by 92¢ to $60.22/bbl on Jan. 27. So far this year, OPEC's basket price has averaged $57.80/bbl, up from an average $50.64/bbl for all of 2005.

Contact Sam Fletcher at samf@ogjonline.com.

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