MARKET WATCH: Supply fears push energy prices higher

Sam Fletcher
Senior Writer

HOUSTON, July 11 -- The front-month crude futures contract jumped more than $5/bbl on July 10 in New York, recovering most of its $9/bbl loss during the first two trading sessions this week, as Iran test fired more rockets.

A flurry of trading hiked the contract's price by $4/bbl in the last 30 min of the open session, said Olivier Jakob at Petromatrix, Zug, Switzerland.

Energy futures prices were still climbing in early trading July 11. "The oil market once again has its eyes set on new record highs as well as the $150/bbl mark," said analysts at Pritchard Capital Partners LLC, New Orleans. "Concerns regarding supplies from Iran and Nigeria were cited, but mostly the gains appear to be a bigger money flow into oil, some short-covering ahead of the weekend, and technical strength." They reported, "Refined product futures are also moving solidly higher with heating oil once again seeing the stronger gains."

On July 9, Iran test-fired nine medium- and long-range missiles in the Persian Gulf, demonstrating that it is equipped to retaliate against attacks by Israel or the US. It fired more missiles July 10 apparently in response to a warning from Secretary of State Condoleezza Rice that the US will defend Israel and other allies if attacked. However, the Organization of Petroleum Exporting Countries also warned that it cannot replace the crude shortfall if Iran is attacked and its production and exports are disrupted.

"Iran has been trying to do as good a public relations exercise as Israel and its 'Glorious Spartan' military exercise early in June," Jakob said. "Israel has been telling the world that maybe it has the logistical capacity of hitting Iran, and Iran has been telling the world that maybe it has the capacity to hit Israel." He noted that discussions continue over a prenegotiation freeze period on the nuclear issue. "If it was not for the missile test, then any advance in the negotiations would have looked like Iran was giving in due to the Israeli threat," said Jakob.

Meanwhile, photography experts said one photo of four Iranian missiles being fired was faked. There is speculation that Iran doctored the photo to cover up its failure to launch one of the missiles in that group.

A statement by the Movement for the Emancipation of Niger Delta that its 2-week ceasefire will end July 12 also helped boost energy prices. Rebels indicated they would resume attacks because of the recent promise by US officials to back the Nigerian government in the conflict that has already shut in a quarter of Nigeria's oil production in the last 2 years. In the interim, security forces said gunmen kidnapped employees of a German construction firm in Port Harcourt, Nigeria, on July 11. The abductees work for Julius Berger Nigeria PLC, a unit of Bilfinger Berger AG, Germany's second-largest builder.

In other news, an oil workers' union in Brazil is threatening a 5-day strike against Petroleo Brasileiro SA, effective July 14, that would shut down oil fields in the Campos basin that produce more than 80% of Brazil's crude. At issue is a 10-year quest by workers for Petrobras to count the day that crews leave the 42 offshore platforms as a working day.

Adam Sieminski, chief energy economist, Deutsche Bank, Washington, said, "Falling oil demand in the US and Europe is offsetting strength in China. But the continuing impact of economic gains in the other non-OECD Asian countries as well as the Middle East, and the 'rest of the world,' mean that oil demand remains strong." He said, "On the tropical storm front, the very warm Atlantic and a decreasing wind-shear environment suggest an active African storm track, but landfalls, for now, seem more likely centered on the Carolinas than the Gulf of Mexico."

Energy prices
The August contract for benchmark US light, sweet crudes escalated by $5.60 to $141.65/bbl July 10 on the New York Mercantile Exchange. The September contract jumped $5.61 to $142.33/bbl. On the US spot market, West Texas Intermediate at Cushing, Okla., was up $5.60 to $141.66/bbl. Heating oil for August delivery rose 18.58¢ to $4.04/gal on NYMEX. The August contract for reformulated blend stock for oxygenate blending (RBOB) gained 13.01¢ to $3.51/gal.

The August contract for natural gas advanced 29.4¢ to $12.30/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., dropped 34¢ to $11.78/MMbtu.

The earlier loss of $1.57/MMbtu through the first three NYMEX sessions this week "had some traders a little shell-shocked," said Pritchard Capital analysts. "A New York floor trader said the market had completely 'blown through' all the support levels he had been tracking, and compounding the losses was the fact that there hadn't been any commensurate weakness in crude oil."

In London, the August IPE contract for North Sea Brent crude increased $5.45 to $142.03/bbl. Gas oil for July remained unchanged at $1,235.50/tonne.

The average price for OPEC's basket of 13 reference crudes gained 52¢ to $133.68/bbl on July 10.

Contact Sam Fletcher at samf@ogjonline.com.

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