MARKET WATCH: Middle East tensions hike oil prices

Crude oil prices continued to climb July 16 with traders focusing more on potential threats to international supply and less on dwindling demand in a weakening economy—at least temporarily.

A US Navy refueling ship fired on a small fishing boat July 16 in the Strait of Hormuz, killing one unarmed fisherman and wounding two others. The Navy said the ship first fired warning shots to signal the boat to stay clear, and then fired at the fishing vessel when it failed to comply. The fishing boat is registered to an UAE-based company but was crewed by Indian nationals. Both the Navy and UAE officials are investigating the incident.

The event highlights the increasing tension among Iran, the US, and European countries in the conflict over Iran’s proposed nuclear program. “Iran has once again threatened to interrupt oil traffic through the Strait of Hormuz; although unlikely, this is enough to raise market concerns. The US has also stepped up its political rhetoric, saying [it] ‘will use all elements of America’s power to prevent Iran from obtaining a nuclear weapon,’” said Marc Ground at Standard New York Securities Inc., the Standard Bank Group.

He reported, “The crude oil markets enjoyed some upside yesterday, with that momentum continuing overnight and pushing Brent to breach $104/bbl this morning, with West Texas Intermediate trading around $88.50/bbl. This has occurred despite the International Monetary Fund’s downward revision of global growth (2012 forecasts revised to 3.5% year-over-year from 3.6%) accompanied by an outlook emphasizing considerable downside risks to these forecasts.”

Speculation whether the US Federal Reserve will initiate a third program of “quantitative easing” (QE) to stimulate the flagging economy also has buoyed oil prices. “Yesterday’s reaction to weak US retail sales data shows just how hungry the market is for QE,” Ground said.

However, the stock market fell in early trading July 17 after Fed Chairman Ben Bernanke in his semiannual report to Congress said the economy has weakened and unemployment reduction is likely to be slow. He reiterated the Fed is ready to take additional steps to bolster the economy “if needed” but again gave no hint as to what action may be taken or when.

Energy prices

The August contract for benchmark US sweet, light crudes increased $1.33 to close at $88.43/bbl July 16 on the New York Mercantile Exchange. The September contract gained $1.31 to $88.81/bbl. On the US spot market, WTI at Cushing, Okla., was up $1.33 to $88.43/bbl.

Heating oil for August delivery rose 3.95¢ to $2.83/gal on NYMEX. Reformulated stock for oxygenate blending for the same month advanced 3.86¢ to $2.85/gal.

The August natural gas contract dropped 7.3¢ to $2.80/MMbtu on NYMEX. On the US spot market, however, gas at Henry Hub, La., continued to rally, up 2.8¢ to $2.90/MMbtu.

In London, the August IPE contract for North Sea Brent closed at $103.55/bbl July 16, up $1.15 for the day. Gas oil for August rose $9.50 to $859/tonne.

The average price for the Organization of Petroleum Exporting Countries’ basket of 12 benchmark crudes increased 83¢ to $99.93/bbl.

Contact Sam Fletcher at samf@ogjonline.com.

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