Sam Fletcher
Senior Writer
HOUSTON, Oct. 26 -- The front-month crude contract jumped to new highs well above $90/bbl Oct. 25 in the New York market as rising political conflict triggered a threat by the speaker of Iraq's parliament to cut off oil exports through Ceyhan, Turkey.
Meanwhile, talks continue between Iraq and Turkey over recent attacks by the Kurdistan Workers' Party (PKK) and threatened retaliation by the Turkish military along the common border of the two countries. "The biggest current news is the threat by Turkey to invade northern Iraq and attack bases of the PKK, the insurgent group that has long battled the Turkish government and army," said Michael C. Lynch, president of Strategic Energy & Economic Research Inc., Amherst, Mass. "This has sent prices spiraling upwards, primarily because the words 'conflict' and 'Middle East' always cause traders to respond with alarm."
However, Lynch said: "The Turks are unlikely to do much more than cross into border regions and attack the mountain bases near there, which are well away from any oil producing areas (located mostly near Kirkuk, over 200 km from the border). Past incursions have accomplished little, and the Turkish government—while facing enormous domestic political pressure to take action—apparently wants a diplomatic solution that would involve the Iraqi government repressing the PKK more effectively. Some military action can be expected, but it is unlikely to be major and should be dismissed by the market fairly quickly."
In their Houston office, Raymond James & Associates Inc. analysts said, "The US has imposed stiff sanctions against some of Iran's military and a number of Iranian banks and companies, accusing them of supporting nuclear proliferations and other terror-related activities. Furthermore, the dollar hit record lows against the euro and other currencies in anticipation that the US Federal Reserve may cut interest rates next week, further driving oil prices upward."
They said, "Another big news event was indications of a slowdown in China's oil demand growth in September, growing at only 0.3% year-over-year, the slowest rate in 20 months. The gap between record-high oil prices and low state-set Chinese prices have pushed refiners to cut runs, leading to some diesel pumps running dry in the country and refiners further absorbing losses, forcing China's oil majors to ration diesel sales. Above all, technical trading further drove prices upward as a wave of call options kicked in as oil broke $90/bbl."
Lynch said, "In Nigeria, there is no apparent progress towards any settlement with rebels, but Royal Dutch Shell PLC is reportedly restoring its Niger Delta production." Export of Nigerian crude through the Forcados terminal is estimated at 100,000 b/d. Earlier this year, Shell was said to have reached an agreement with the main group of militants to allow the company to resume operations.
"Possibly, this is a sign that this agreement is functioning and another 350,000 b/d or so will be added to Nigerian production in coming months," Lynch said. "Still, there are continued reports of attacks on oil installations and kidnappings of workers, including Shell's EA field, so it remains unclear whether the situation is improving or not."
Energy prices
The December contract for benchmark US light, sweet crudes jumped as high as $90.60/bbl in intraday trading Oct. 25 on the New York Mercantile Exchange before closing at a record $90.46/bbl, up $3.36 for the day. The January contract escalated by $3.11 to $89.24/bbl. On the US spot market, West Texas Intermediate at Cushing, Okla., was up $3.61 to $92.97/bbl. The November contract for reformulated blend stock for oxygenate blending (RBOB) climbed 8.83¢ to $2.24/gal on NYMEX. Heating oil for the same month gained 6.64¢ to $2.41/gal.
The November natural gas contract rose 21.6¢ to $7.19/MMbtu on NYMEX. On the US spot market, natural gas at Henry Hub, La., climbed 26¢ to $6.47/MMbtu. "Natural gas prices may be on their way up, with temperatures expected to rise about 5 degrees next week in Los Angeles and fall the same amount in New York and Boston. The temperature fluctuations should spur additional cooling demand in the west, and heating demand in the east," Raymond James analysts said.
Olivier Jakob, managing director of Petromatrix GMBH, Zug, Switzerland, said, "In this edgy market, we would still point to a tropical disturbance over the Virgin Islands, which has, according to the National Oceanic & Atmospheric Administration, some potential to become a tropical depression and could veer towards the US sector of the Gulf of Mexico. We would not qualify it yet as a threat to oil assets but given that bullish items are currently over-amplified, we will pay attention to any upgrade on that disturbance and this could be a further element keeping short sellers shy in front of the weekend."
In London, the December IPE contract for North Sea Brent crude gained $3.11 to $87.48/bbl. Gas oil for November picked up $9.50 to $742.25/tonne.
The Organization of Petroleum Exporting Countries' Secretariat in Vienna was closed Oct. 26 for a public holiday, so no OPEC basket price was available.
Contact Sam Fletcher at [email protected].
