MARKET WATCH
Prudhoe Bay disruption pushes up energy prices

Sam Fletcher
Senior Writer

HOUSTON, Aug. 7 -- Energy prices retreated below $75/bbl on Aug. 4 as Tropical Storm Chris dissipated in the Caribbean, then spiked above $76/bbl Aug. 7 in overnight electronic trading after BP PLC began shutting in 400,000 b/d of crude production from Prudhoe Bay over the weekend because of a pipeline leak.

BP Exploration Alaska Inc. said workers on Aug. 6 found a small spill of 4-5 bbl of crude from a transit line connecting that field to the Trans-Alaska Pipeline System (TAPS). That spill has been contained and is being cleaned up, but workers are shutting down the transit line to the nation's largest oil field in order to assess and repair the corrosion that caused the spill. The company has given no indication of how long the field may be shut in.

Some crude is still moving through the Alyeska Pipeline to loading terminals in Valdez. That pipeline delivered an average 891,104 b/d of crude to that terminal in 2005.

Disruption of Alaska North Slope production previously was not among the major concerns plaguing world oil markets as traders concentrated on the threat of hurricanes in the Gulf of Mexico and violence in the Middle East.

In an Aug. 7 report, Standard & Poor's Ratings Services examined four different scenarios of how crude prices may be affected by developments in the Middle East.

If the current fighting subsides without spreading to Syria or Iran, oil prices could subside to $70/bbl by yearend, said S&P's analysts. According to their second scenario, they said: "The conflict spreads to Iran, perhaps because of air strikes by Israel or the US on nuclear or other facilities. Iran stops exporting oil. However, the Strait of Hormuz, through which most Persian Gulf oil flows, remains open, and Arab states continue to export." Energy prices still would move higher, however.

The third scenario is similar to the second, "except that Iran partially closes the Strait of Hormuz." S&P analysts said, "Most Persian Gulf oil shipments are shut down for a period of 6 months before the vital shipping lane reopens." That would push energy prices higher still.

In their fourth scenario, S&P analysts said: "The Persian Gulf countries join in a selective embargo of the US, refusing to export oil to the world's biggest energy consumer but continuing to supply it at similar volume to Asia, Europe, and other oil-importing regions. Venezuela cooperates with the Arab embargo." That would drive up energy prices in the US but not necessarily in the rest of the world.

"Worse cases than any of these are entirely possible, with resulting impacts on the US and world economy that are nearly impossible to model. The best hope is for a diplomatic breakthrough—and a little luck—to help limit the outcome to the first scenario," said David Wyss, S&P chief economist.

In a separate Aug. 7 report, analysts in the Houston office of Raymond James & Associates Inc. said: "Over the weekend, Middle East fighting intensified amid stronger-than-expected resiliency from Hezbollah guerillas. A US-French proposed resolution to end the fighting will be submitted to voting at the UN Security Council early this week.

"On the Iranian front, Tehran has vowed to pursue the country's nuclear program, ignoring last week's [United Nation] resolution urging it to curb nuclear activities. As tensions rise, the Iranian issue is set to take center stage in the upcoming weeks and may fuel higher oil prices. In the natural gas markets, prices may fall on forecasts that the hurricane season will not be as severe as initially predicted, easing concerns that Gulf of Mexico production will be disrupted."

Energy prices
The September contract for benchmark US light, sweet crudes retreated by 70¢ to $74.76/bbl Aug. 4 on the New York Mercantile Exchange. But it bounced back to $76.55/bbl in electronic trading before that market reopened. The October contract was down by 58¢ to $76.16/bbl on Aug. 4. Gasoline for September delivery fell by 6.19¢ to $2.23/gal with no storms threatening Gulf Coast refineries at the end of last week. Heating oil for the same month lost 2.39¢ to $2.09/gal. The September gas contract slipped by 4.6¢ to $7.25/MMbtu.

In London, the September IPE contract for North Sea Brent crude lost 39¢ to $76.17/bbl. However, the August contract for gas oil increased by $4.25 to $652.50/tonne.

The average price for the Organization of Petroleum Exporting Countries' basket of 11 benchmark crudes inched up by 1¢ to $71.09/bbl on Aug. 4. So far this year, OPEC's basket price has averaged $62.51/bbl.

Contact Sam Fletcher at samf@ogjonline.com.

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