Middle East peace undercuts crude prices

Sam Fletcher
Senior Writer

Crude prices tumbled Aug. 14-17, dropping a total $4.29 to a 2-month low closing of $70.06/bbl on the New York market after a United Nations-sponsored ceasefire in Lebanon went into effect and BP PLC said it would keep online half of Prudhoe Bay, the biggest US oil field, while corroded transit lines are repaired.

The September contract traded as low as $69.90/bbl before rebounding to close at $71.14/bbl Aug. 18.

"Concerns over the disruption of oil are slowly dissipating due to the Lebanon ceasefire order," said analysts at Raymond James & Associates Inc. "Also exacerbating downward pressure on oil is news that the Organization of Petroleum Exporting Countries has revised its 2006 forecast for world crude demand because of less consumption by industrialized countries, including the US. Specifically, world oil demand is now 84.5 million b/d, which is 80,000 [b/d] less than last month's forecasts."

Some observers remained pessimistic about peace in the Middle East. "It will not take very long before we see renewed ground fighting," predicted Olivier Jakob, managing director of Petromatrix GMBH, Zug, Switzerland (OGJ Online, Aug. 14, 2006).

Market outlook
No one has estimated how long production from the eastern half of Prudhoe Bay will be shut in. Meanwhile, Societe Generale (SG) reported West Coast refiners are "snapping up cargoes" of suitable crudes from Oman, West Africa, and Russia and "frantically chartering" tankers to replace lost Prudhoe Bay oil supplies.

"What is at stake is the 86,000 b/d of gasoline that SG estimates [Los Angeles] refineries normally made from the [Alaska North Slope crude] they ran," said SG analyst Deborah White. "West Coast primary stocks of gasoline can be drawn relatively little�2 million bbl, we estimate�cold comfort in the face of West Coast gasoline demand of 1.6 million b/d, 1.1 million b/d of that reformulated gasoline (most ultraclean California Air Resources Board quality), and a potential gasoline shortage centered in highly automobile-dependent Los Angeles."

She said, "SG advises the affected refiners to immediately persuade the US Strategic Petroleum Reserve to grant emergency loans of crude only 2 weeks from Los Angeles," vs. longer time-lines for replacement imports.

The US Department of Energy has offered to release SPR supplies, but no refiner has yet requested a loan. Jakob earlier advised against diverting SPR crude to the West Coast while the Gulf Coast is still exposed to the annual hurricane season (OGJ Online, Aug. 9, 2006).

Meanwhile, civil unrest in Nigeria and a standoff between the United Nations and Iran over its nuclear program provided a "white noise" background in energy markets. Neither now is impacting energy prices but may do so eventually. Just days before its self-imposed deadline of Aug. 22, Iran showed no sign of responding favorably to incentives for resolving the nuclear dispute.

Following kidnappings by militants of 16 workers from oil facilities, the Nigerian government ordered continuous security patrols in the Niger Delta and threatened to sanction international oil companies if they ransom employees.

A bearish report by the US Department of Commerce indicating a slowing US economy helped undercut energy prices. "So far high oil prices have not caused recession in the economically developed world; indeed continuing high oil prices are contributing to more efficient use of current technology, and in the long term they are energizing moves toward sustainable energy technology," said analysts at Chatham House, also known as the Royal Institute of International Affairs in London, a nonprofit, nongovernmental organization for the study of international issues. "However, oil is signing its own death warrant by pricing itself out of the market and making previously expensive alternatives highly attractive to energy consumers."

The Energy Information Administration reported the largest decline in US gasoline demand in 4 months. US crude inventories fell 1.6 million bbl to 331 million bbl in the week ended Aug. 11. Gasoline stocks dropped 2.3 million bbl to 205.4 million bbl during the same period, but distillate fuel inventories increased by 800,000 bbl to 133.2 million bbl (OGJ Online, Aug. 16, 2006).

"In the past week, the most significant market move has been the more-than $10/bbl, or 25¢/gal, fall in gasoline prices and the accompanying fall in gasoline cracks," said Paul Horsnell, Barclays Capital Inc., London. The gasoline market "has been negatively affected by the potential return of some Bonny Light exports from Nigeria," he said.

Royal Dutch Shell PLC recently reactivated its oil pipeline in the troubled Niger Delta area of Nigeria. Shell declared force majeure on 180,000 b/d of Nigerian crude production in late July because of an unexplained leak in that pipeline.

(Online Aug. 21, 2006; author's e-mail: samf@ogjonline.com)

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