MARKET WATCH: Crude price makes record jump past $138/bbl

Sam Fletcher
Senior Writer

HOUSTON, June 9 -- In its biggest one-day gain in history, the front-month crude futures contract shot up nearly $11/bbl June 6 to a new high in the New York market as fearful traders reacted to talk of a potential Israeli attack on nuclear facilities in Iran.

Israel's Transport Minister Shaul Mofaz told a newspaper that Israel will attack if Iran continues a program for developing nuclear weapons. That followed a jump of more than $5/bbl during the previous trading session after Jean-Claude Trichet, president of the European Central Bank, said the bank might raise its interest rates (OGJ Online, June 6, 2008).

By triggering "a $16/bbl rally in slightly more than 24 hr; Trichet has managed what no war, no hurricanes, no OPEC has ever managed to do," said Olivier Jakob at Petromatrix, Zug, Switzerland. Crude futures prices started last week in a downward corrective phase "but reversed course violently when Trichet shocked the financial system by pointing to an interest rate hike in July," he said. As a result, he said, benchmark US crude gained a total of $11.19/bbl through all of last week. North Sea Brent was up $9.91/bbl overall. Heating oil escalated by $12.90/bbl, and reformulated blend stock for oxygenate blending (RBOB) increased by $8.40/bbl. "West Texas Intermediate is now $74/bbl higher than a year ago," Jakob said.

In the Houston office of Raymond James & Associates Inc., analysts also see "a clear relationship" between the strength of the US dollar and crude prices, noting that the dollar fell vs. the euro after Trichet indicated a rate increase. "The move on Friday was obviously exacerbated by short covering, as well as some saber rattling by Israel, and perhaps even a $150/bbl oil by July call" by investment banks, they said.

Analysts at Goldman Sachs Group Inc. joined Morgan Stanley in predicting last week that benchmark US crude will increase to $150/bbl by July 4.

The July contract for benchmark US light, sweet crudes hit a record high of $139.12/bbl in intraday trading June 6 on the New York Mercantile Exchange before closing at $134.54/bbl, up $10.75 for the day. It climbed past $139/bbl overnight in electronic trading, but the market appeared to cool off with prices down in early trading June 9. After last week's price spike, analysts at Pritchard Capital Partners LLC, New Orleans, said, "Market watchers thought the fallout up and down the supply chain could be 'painful' this week."

Meanwhile, Raymond James analysts said, "Even in the face of nearly $140/bbl oil, the Organization of Petroleum Exporting Countries is still adamant that it will not make production decisions before its next meeting in September."

Raymond James analysts also reported, "The net result of improving efficiencies at the rig level through the application of technology has essentially been erased by the increasingly complex wells being drilled in the US. As a result, the number of wells drilled on average each year on a per-rig basis has remained, and is likely to continue to remain, flat."

They said, "We have witnessed somewhat of a resurgence in the percentage of drilling activity dedicated to the oil market, which is probably part of the reason why overall drilling efficiency has somewhat improved since 2004. As the market continues to derive an increasing amount of natural gas and activity from the more complex shale plays, the demand for additional land drilling rigs (and associated services for) are likely to rise further, putting upward pressure on service costs going forward."

Energy prices
On NYMEX, the August crude contract escalated by $10.52 to $138.70/bbl. On the US spot market, WTI at Cushing, Okla., was up $10.76 to $138.55/bbl. Heating oil for July delivery climbed by 29.32¢. RBOB for the same month closed at $3.55/gal, up 21.35¢ for the day, after setting a new high of $3.57/gal in intraday trade.

The July natural gas contract also hit an intraday record, $12.82/MMbtu, in a push toward the $13 mark, but closed at $12.69/MMbtu, up 17.4¢ for the day. A US spot market price for gas at Henry Hub, La., was not available.

In London, the July IPE contract for North Sea Brent crude was up $10.15 to $137.69/bbl at closing after recording a record $138.12 in intraday trade. The June gas oil contract shot up $95 to $1,248.75/tonne.

The average price for OPEC's basket of 13 reference crudes jumped by $7.34 to $126.11/bbl on June 6. So far this year, OPEC's basket price has averaged $101.56/bbl.

Contact Sam Fletcher at samf@ogjonline.com.

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