April crude futures prices jumped above $63/bbl during trading Feb. 24 in the New York market after Saudi Arabian security forces foiled a suicide attack on the kingdom's Abqaiq production and processing center.
That heavily guarded facility in eastern Saudi Arabia processes two thirds of the country's oil before it is exported. Guards fired on attackers in two cars bearing the Saudi Aramco logo as they tried to enter the facility, detonating the vehicles and killing the people inside (OGJ Online, Feb. 24, 2006). Officials later reported no damage to the facility and no disruption of operations.
Abqaiq is the "most sensitive target of all" in the Persian Gulf, said Paul Horsnell of Barclays Capital Inc., London. "It is that aspect rather than any belief that the attack had a significant chance of success that has perhaps proved the most unsettling from a market perspective."
The April contract of benchmark US light, sweet crudes traded as high as $63.25/bbl Feb. 24 on the New York Mercantile Exchange before closing at $62.91/bbl, up $2.37 for the day. Energy prices had risen early that week as rebels again disrupted production in Nigeria but then fell when the US Energy Information Administration reported commercial inventories of US crude increased by 1.1 million bbl to 326.7 million bbl during the week ended Feb. 17. US gasoline stocks inched up by 100,000 bbl to 225.6 million bbl, the highest level since June 4, 1999. Distillate fuel inventories dropped 1.3 million bbl to 135.6 million bbl in the same period (OGJ Online, Feb. 23, 2006).
Political problems 'swarm'
Geopolitical problems "arrived in a swarm" during the week ended Feb. 24, Horsnell said. "The situation in the Nigerian oil industry worsened significantly, Iraq took a quicker step down the path of disintegration and insecurity of exports, and there was a foiled attack on the most important single facility within the global oil industry. That represents a major demonstration and escalation of risks." And yet the April contract for benchmark US light, sweet crudes was up by only $1.62/bbl over the week on NYMEX, Horsnell noted.
"Unhedged money appears to be content that increases in US inventories [of crude and gasoline] compensate for risks. In our view, more global spare capacity would achieve that end, but US inventories appear to be a poor substitute," he said.
Despite the new wave of violence in Saudi Arabia, Horsnell still viewed Nigeria as "the most important of the geopolitical elements." Royal Dutch Shell PLC already had shut in Nigerian production totaling 455,000 b/d following recent kidnappings of workers and rebel attacks on oil facilities in the Niger Delta (OGJ Online, Feb. 21, 2006). "It is not obvious to us that there is much effective defense available should rebel groups decide to attack further facilities. If that becomes perceived as the case within the region, it is then also not clear to us how company operations can be maintained at current levels," Horsnell said.
He noted a recent ruling by a Nigerian court requiring oil companies to pay $1.5 billion to Ijaw areas as compensation for environmental damage. "Although that payment is one rebel demand, their aspirations appear to run further than that issue alone," Horsnell said. "Nigeria looks set to be a source of volatility for a while to come yet."
Meanwhile, the "accelerating disintegration" of Iraq "raises questions as to the security and even the future legal basis of exports in a situation of central collapse," Horsnell said. "It is also likely to lead to yet more delays in the timeline for any recovery of Iraqi output, and to further short-term declines related to the investment drought and lack of organization."
Iran's "prototype deal" with Russia over the weekend to establish a joint uranium enrichment venture marks a breakthrough in talks on a US-backed Kremlin proposal aimed at easing concerns that Tehran wants to build nuclear weapons. That "might provide unhedged money with another chance to sell," Horsnell said. "It also provides Europe and the US with a potential opportunity to draw a veil over the issue, but we still rather doubt that that option will be taken."
Beyond geopolitics, Horsnell said, the rapid move from methyl tertiary butyl ether to ethanol in reformulated gasoline (RFG) on the East Coast and in Texas will likely lead to price spikes. Ethanol-blended RFG involves reduction of some 5-6% in production capability outside California in the summer. Ethanol is likely to be in tight supply, and transportation will be strained by the need to move it from the Midwest to the East Coast.
(Online Feb. 27, 2006; author's e-mail: firstname.lastname@example.org)