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Lack of peace boosts prices

Sam Fletcher
OGJ Senior Writer

Crude prices are sure to rise since “world peace isn't breaking out,” said analysts in the Houston office of Raymond James & Associates Inc.

They said, “A geopolitical risk premium of some magnitude looks set to remain in oil prices on a permanent basis. As the market comes to recognize this reality, combined with improving visibility on global oil demand, we look for oil prices to continue drifting higher to the $80-plus level towards the end of 2010. And if war with Iran becomes inevitable, then oil goes a lot higher.”

The near-month price for benchmark US crude occasionally bobbed above $70/bbl on the New York Mercantile Exchange in late June due to disruptions of oil exports from Nigeria. Oil was up in early trading June 29 on reports Royal Dutch Shell PLC closed a major oil field in Nigeria after several production wells were attacked, following earlier claims by the rebel Movement for the Emancipation of the Niger Delta of wellheads being bombed in Shell’s Afremo oil field. Even earlier, Shell confirmed militant attacks damaged a pipeline carrying benchmark Bonny crude to the key export terminal in Nigeria.

Olivier Jakob at Petromatrix, Zug, Switzerland, said attacks on oil facilities in the delta have likely reduced Nigeria’s current production to 1.3-1.4 million b/d, down from 1.9 million last July and 1.8 million in the first quarter of this year. “The attacks on the pipeline infrastructure are also having an impact on the running of the local refineries; Warri and Port Harcourt are said to be shut, and Kanuda [is reported] running on stocks, which will run out in…weeks and provide some support to the Atlantic Basin light-end products,” he said.

He questioned if the market has priced enough of a risk premium on Nigeria. He said, “If you are a refiner on the US East Coast running on Nigeria light crude oil, you do not change your slate overnight to Arabian Heavy, and Saudi Arabia will anyway not move [to increase production] before global stocks have been reduced. One way or another, Nigerian disruptions should lead to an acceleration in the reduction of light, sweet crude oil stock, and this provides a risk for an acceleration in the reduction of the futures contango” (OGJ Online, June 26, 2009).

Jakob is “cautious” in his outlook for the Nigerian government’s offer of amnesty to militants. “There is money involved, hence some militants might go for that; but the ones that lay down their arms only leave the territory and its associated business to the ones that don’t, so we will remain skeptical about the whole deal,” he said.

Iranian discord
Raymond James analysts also noted continuing discord in Iran. “There are two roads ahead for the Iranian nuclear standoff. One road leads to a peaceful solution, a diplomatic compromise under which Iran fully complies with its obligations, presumably in exchange for some ‘carrots’ from Europe or others. The second road leads to higher oil prices. At best, this second road includes the imposition of meaningful economic sanctions, and if that doesn't work, potentially, military action,” they said.

“If President Mahmoud Ahmadinejad stays in office, Iran is clearly set to continue heading down the second road, but even if he is replaced by a more moderate figure like Mir Hossein Mousavi, that route remains a real possibility. Assuming we are already headed down the second road, the question then shifts to timing. We think the odds of imminent military action are slim as President Barack Obama struggles to find his place as a world leader. That said, we think the odds of an Iranian oil problem begin to rise rapidly through 2010 as Iran presumably approaches the ‘point of no return’ for nuclear weapons capability.”

As for other disruptions, Raymond James analysts said, “Russia has long been playing hardball with international oil companies. Venezuela has expropriated foreign-owned oil properties (and, more recently, oil service equipment).”

In New Orleans, analysts at Pritchard Capital Partners LLC noted China’s push to build crude reserves through loans to Petroleo Brasilerio SA in Brazil and OAO Rosneft in Russia, as well as its purchase of Addax Petroleum Corp. “The Chinese are aggressively increasing the size of their energy footprint in order to meet future demand growth. China also plans to increase its strategic crude oil reserves by 160% to 270 million bbl over the next 5 years, and will begin building a second group of stockpiling bases as early as this year, at a cost of $4.39 billion,” they said.

(Online June 29, 2009; author’s e-mail: samf@ogjonline.com)


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