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MARKET WATCH: Crude oil prices climb in first 2012 market session

Having posted a loss on the last trading day of 2011 after a failed effort to break the $100/bbl barrier, oil prices soared Jan. 4 in the first trading session of 2012 to just short of $103/bbl on the New York market.

To sustain that rally, Olivier Jakob at Petromatrix in Zug, Switzerland, said, “West Texas Intermediate needs to break the resistance of the recent highs at $103.37/bbl and after that the next big resistance line will not be before $105/bbl—price levels that were last reached on a rising trend in early 2011 on the back of the Libyan crisis.”

The current confrontation between the US and Iran over Iran’s nuclear program and threats to close the Strait of Hormuz is a factor in the price jump, fanned by excited reports in the general media.

Judging from the latest rhetoric from Iranian officials, Jakob said, “The battle over the free passage in the Strait of Hormuz has started. This does not mean that we believe that Iran will be firing missiles and dropping mines tomorrow, but rather we believe that they will start to challenge the legality of the passage of certain ships in their territorial waters. We think that lawyers in International Public Law will soon be busy.”

Under the United Nations law of the sea, Iran is not to stop innocent passage of warships through the strait. But since the US has officially declared the end of the war in Iraq, Jakob said, “There is no absolute need for US aircraft carriers to be in the Persian Gulf unless of course it is to potentially target Iran. The US would respond that they can freely move their aircraft carriers where they want, but Iran could challenge the ‘innocent’ aspect of US aircraft carriers passing in their territorial waters.”

If Iran prohibits US warships from transiting territorial waters, Jakob said, “This is not by itself a case of ‘casus belli’ to retaliate militarily on Iran.” US warships could still move through the strait “given that the shipping lanes in the strait are on the Omani side,” he said. “Inside the Persian Gulf the US warships would have to use the shallower waters of the UAE rather than sailing on the Iranian side, but we do not think that this is a real issue.”

However, the continued confrontation “does increase the risk of miscalculation on both sides,” Jakob said. He expects Iran to continue a “soft escalation” of conflict “as it is in their interest to keep the oil prices as high as possible, not only for the purpose of increasing their revenues but to weaken Europe further. The next major step for the escalation in the Iranian conflict will be the European decision on an import ban at the end of the month.”

Jakob said, “The paradox with Europe being the next trigger in the Iranian conflict is that Europe at current oil prices is more than likely to head into a deep recession.” With the weakening of the euro, he said, “The [European] price of Brent is comparable to $133/bbl in 2008 terms, and with the product cracks under an upside risk due to closure of the Petroplus Holdings AG refineries, Europe is heading into new absolute record oil prices at the same time that the southern European countries are heading into new austerity measures and record unemployment. The oil price spike in 2011 due to the attack on Libya did not help the European recovery and pushing for a showdown with Iran in 2012 will also have a significant negative impact on European economies and more particularly the southern European countries. China is also not immune anymore to high oil prices.”

On the other hand, Iran is dependent on oil exports for most of its revenue, and many think its small outdated navy would quickly be swept aside if there is a military disruption of shipping through the strait.

Meanwhile, in Jan. 3 trading, Jakob said, “The Standard & Poor’s 500 had some strong first-day-of-the-year gains, but at current oil prices we will not be too optimistic about the prospects for the global economy in 2012. Use of the European Central Bank deposit facility reached a record high yesterday; hence it would be very premature to be relaxed about the European credit crunch.”

Energy prices

The February contract for benchmark US light, sweet crudes jumped $4.13 to $102.96/bbl Jan. 3 on the New York Mercantile Exchange. The March contract escalated $4.14 to $103.14/bbl. On the US spot market, West Texas Intermediate at Cushing, Okla., was up $4.13 to $102.96/bbl.

Heating oil for February delivery climbed 12.4¢ to $3.04/gal on NYMEX. Reformulated stock for oxygenate blending for the same month rose 9.12¢ to $2.75/gal.

The February natural gas contract inched up 0.4¢ to finish virtually unchanged at a rounded $2.99/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., declined 0.8¢ but was essentially unchanged at $2.96/MMbtu.

In London, the February IPE contract for North Sea Brent gained $4.75 to $112.13/bbl. Gas oil for January jumped $29.50 to $953.50/tonne.

The average price for the Organization of Petroleum Exporting Countries’ basket of 12 benchmark crudes escalated $2.56 to $109.40/bbl.

Contact Sam Fletcher at samf@ogjonline.com.


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