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A run of record high prices

Sam Fletcher
Senior Writer

The front month crude contract hit record highs in either intraday trading or closings—usually both—in eight consecutive trading sessions Sept. 11-20 on the New York Mercantile Exchange.

That run of escalating prices was even more outstanding since it started the same day that members of the Organization of Petroleum Exporting Countries voted to increase their oil production by a total 500,000 b/d effective Nov. 1. That decision excludes production by Angola and Iraq and affects only the other 10 members (OGJ Online, Sept. 11, 2007).

The October contract for benchmark US light, sweet crudes climbed from $77.49/bbl at the close of the Sept. 10 session on NYMEX to an intraday peak of $84.10/bbl and a closing price of $83.32/bbl on its expiration Sept. 20. The new front-month November contract dipped 16¢ to $81.62/bbl Sept. 21. In its last eight days of trade, the October contract retreated only once, down 99¢ to $79.10/bbl in profit taking Sept. 14, but even then it set an intraday high of $80.92/bbl.

From the start, the world oil market seemed to shrug off OPEC's promised production increase as primarily symbolic, since the 10 members now subject to quotas, with Iraq and Angola currently exempted, were estimated to have produced roughly 1 million b/d above the current ceiling in August. Subsequent factors continued to stimulate higher oil prices.

The October contract jumped above $82/bbl Sept. 18 on NYMEX after the US Federal Reserve cut its target interest rate by a larger-than-expected half of a percentage point to 4.75% to stem a possible slowdown in the US economy. That cut was on the high side of the reduction anticipated by most economists and plunged the dollar index to a record low. Meanwhile some analysts remained wary of possible inflation.

Benchmark US crude prices again were spurred higher Sept. 19-20 as tropical storm began building in the eastern Gulf of Mexico. On Sept. 20, the US Minerals Management Service reported 5 of the 834 production platforms and 3 of 89 mobile rigs in the US sector of the gulf were evacuated. MMS officials reported offshore operators had shut in as much as 1.3 million b/d of crude and 1.9 bcfd of natural gas production from federal leases. By Sept. 22, however, crews were going back offshore after Tropical Storm Jerry came ashore in the Florida panhandle Sept. 21.

The Iranian factor
Meanwhile, on the international front, there were discussions Sept. 21 in Washington, DC, about possibly more sanctions on Iran in the ongoing attempt to get that country to abandon its uranium enrichment program. "While we expect the Russians and Chinese to continue to oppose new sanctions, it should make for more geopolitical sound bites. And this should continue into next week as the world leaders are gathering in New York for the United Nations general assembly," said Olivier Jakob, managing director of Petromatrix GMBH, Zug, Switzerland.

Barclays Capital Inc. analyst Paul Horsnell in London said, "International tensions surrounding Iran appear to be in the process of stepping up, with diplomacy moving further away from the carrot and closer to the stick." He sees 2008 "as the year of maximum danger, although it does not appear that the core issues themselves, or the core dangers in the situation, would necessarily change following the change of US administration."

Horsnell said, "We are placing a partial allowance for the worst of any Iranian-linked tension in the second half of 2008, having nudged our 2008 West Texas Intermediate price forecast up to $77/bbl from the previous forecast of $73.90/bbl."

Gasoline prices
Although crude prices have rallied steadily over the past month, gasoline prices have not moved as high or as quickly in the same time period. The October contract for reformulated blendstock for oxygenate blending (RBOB) fluctuated from $1.98/gal Sept. 10 on NYMEX to $2.11/gal as of Sept. 21. Raymond James analysts cite three reasons for this:

-- The decline in gasoline demand with US exiting the summer driving season.

-- The use of ethanol as a gasoline additive. Ethanol prices have dropped 30% in recent months.

-- Gasoline imports remain at a healthy level.

However, they said, "If crude prices continue their upward trajectory, gasoline prices will inevitably follow. Also, the recently lowered interest rates should help in spurring economic growth, resulting in an increase in gasoline demand. Furthermore, with gasoline supplies still at historical low levels, any supply disruption has the ability to meaningfully pushed prices higher."

(Online Sept. 24, 2007; author's e-mail: samf@ogjonline.com)


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