MARKET WATCH: Iranian threats push crude above $101/bbl in New York market

The front-month crude futures contract rose 1.7% to close above $101/bbl Dec. 27 in the New York market as Iran’s Vice-President Mohamed Reza Rahimi threatened to close the Strait of Hormuz if western nations sanctioned the country's oil exports in an effort to stop its nuclear program.

The head of Iran’s navy reiterated that threat Dec. 28. Adm. Habibollah Sayyari told state-run Press TV, “Closing the Strait of Hormuz is very easy for Iranian naval forces.” However, the US Navy responded that such a move “will not be tolerated.”

In Houston, analysts at Raymond James & Associates Inc. reported, “The 12-month West Texas Intermediate strip jumped 1.5% to close above the $100/bbl mark. Natural gas finished the day flattish.” However, energy prices were down in early trading Dec. 28 when Saudi Arabia said it will offset any loss of oil from a threatened Iranian blockade. The problem is the Strait of Hormuz is the chokepoint for crude from Saudi Arabia and Iraq shipped through the Persian Gulf.

Meanwhile, in a show of strength the US Navy is involved in a 10-day war game in 1,250 miles of international waters off the Strait of Hormuz, northern parts of the Indian Ocean, and into the Gulf of Aden near the entrance to the Red Sea.

The European Union, whose members buy 25% of Iranian crude exports (450,000 b/d), said earlier this month that it is considering such an embargo and a decision by the council of ministers is expected by the end of January. However, the stronger economies in northern Europe who import little or no Iranian crude are the strongest advocates for an embargo, while smaller countries in southern and eastern Europe that are more dependent on Iranian crude are less than eager.

“Threats from Iran are hardly new, and while some of them are purely saber-rattling, the regime has had its share of actual outrages, e.g., the recent attack on the British embassy,” said Raymond James analysts. “A blockade of Hormuz, which carries 15 million b/d of oil supply, would obviously be a huge escalation, but just the threat alone is enough to raise the geopolitical risk premium in the oil market.”

Olivier Jakob at Petromatrix in Zug, Switzerland, said, “Shutting down the strait is the last bullet that Iran has, and therefore we have to express some doubt that they would do this and at the same time lose their support from China and Russia. One thing though is that Iran could try and challenge legally the passage in their territorial half of the strait. It would still leave open the Omani half of the strait and oil could still flow out of the [gulf] on an alternate basis through the Omani side. That would make the voyage a bit longer but would not stop the oil flows.”

Refining loss looms

In other news, Zug-based Petroplus Holdings AG, Europe's largest independent refiner, “has probably never been this close to becoming ‘Petrominus,’” Jakob said. The company’s $1 billion revolving credit facility has been frozen by its lenders, “and that will now make it extremely hard for the company to continue operating. The shares of Petroplus lost 46% yesterday,” he said.

Petroplus anticipated 460,000-510,000 b/d throughput at its five European refineries this quarter. “The ‘Petroplus Market Indicator’ for its refining margin is based on 40% Urals, 35% Forties, 12% CPC, and 13% Bonny Light,” Jakob reported.

He noted, “The US is losing 700,000 b/d of refining capacity on the East Coast (Sunoco and Conoco) and if Petroplus turns to ‘Petrominus,’ then altogether it is close to 1.4 million b/d of refining capacity that could be lost in the northern Atlantic Basin in the first half of 2012 compared [with] the first half of 2011. The lost crude oil demand that would come with Petroplus shutting down would make it easier in the balances for Europe to force a ban on Iranian crude oil; the only problem, however, is that a ban on Iranian crude oil could put the existence of the Greek refineries in jeopardy. Therefore the loss of refining capacity in the northern Atlantic Basin is not necessarily over.”

Jakob said, “Crude oil is simply too expensive compared to end-user demand and the current European credit crunch is not helping(amounts deposited by banks at the European Central Bank deposit facility rather than in the inter-bank market reached a new record). As a result, the amount of refining capacity about to be closed in the Atlantic Basin is just tremendous. The Iranian headlines might be supporting crude oil, but if Petroplus shuts down then we will want to move the long exposure to products rather than crude oil given that a total of 1.4 million b/d of lost refining capacity is not a small number for the supply of products, while on the crude oil side we will have to combine a 1.4 million b/d loss of crude oil refinery demand with a 1.2 million b/d gain of crude supply from Libya, when comparing the first half of 2012 with the first half of 2011.”

2012 capex outlook

Analysts at Pritchard Capital Partners LLC said, “With domestic natural gas trading at current low levels and mild weather around the country, we think 2012 capital expenditures focused in dry gas basins face an additional risk. Even though winter is just beginning and January and February can bring Arctic weather, at this point we are favoring companies with international and crude oil exposure rather than the ones more concentrated on domestic dry gas.”

They said, “Crude oil still trades at levels attractive to operators and remains exposed to political risks around the globe, thus tending to bolster cash flows and spending. This is combined with the fact that short-term fluctuations usually do not affect spending by the majors, national oil companies, and international oil companies—these companies are usually investing for the long term. We heard just last week that India's Oil and Natural Gas Corp. expects to spend $5.9 bill on capex next year, an increase of 11%. We expect this trend to continue and to hear similar announcements from other IOCs, NOCs, and the majors.”

Energy prices

The February contract for benchmark US light, sweet crudes rose $1.66 to $101.34/bbl Dec. 27 on the New York Mercantile Exchange. The March contract gained $1.63 to $101.46/bbl. On the US spot market, West Texas Intermediate at Cushing, Okla., was up $1.66 to $101.34/bbl.

Heating oil for January delivery increased 1.78¢ to $2.91/gal on NYMEX. Reformulated stock for oxygenate blending for the same month inched up 0.16¢ but closed essentially unchanged at a rounded $2.69/gal.

The January natural gas contract dipped 0.2¢ but also closed virtually unchanged at a rounded $3.11/MMbtu on NYMEX. On the US spot market, however, gas at Henry Hub, La., escalated 12.1¢ to $3.09/MMbtu.

In London, the February IPE contract for North Sea Brent increased $1.31 to $109.27 bbl. Gas oil for January rebound by $10 to $924.50/tonne.

The average price for the Organization of Petroleum Exporting Countries’ basket of 12 benchmark crudes was up 12¢ to $107.77/bbl. So far this year, OPEC’s basket price has averaged $107.47/bbl.

Contact Sam Fletcher at samf@ogjonline.com.

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