Sam Fletcher
Senior Writer
HOUSTON, June 24 -- Crude prices continued to rise June 23 as traders shrugged off Saudi Arabia's promise to produce more oil and invested instead in the possibility that civil unrest in Nigeria could reduce production even more.
At a June 22 meeting of oil producers and consumers in Jeddah, Saudi Arabia said it would increase production to 9.7 million b/d in July and promised even more output when the Khursaniyah oil field comes on stream. "Saudi Arabia is proposing only an additional 200,000 b/d of supply for July [on top of a 300,000 b/d hike announced in May] but went all over the newswire yesterday to claim that the Khursaniyah 500,000 b/d field would finally start in August," said Olivier Jakob at Petromatrix, Zug, Switzerland.
Several analysts say Saudi Arabia's two latest production increases have already been factored into the market, however. Meanwhile, analysts in the Houston office of Raymond James & Associates Inc. reported crude prices were climbing higher in early trading June 24 in New York "for the third day in a row as Nigeria's white-collar oil union continues its strike against Chevron [Corp.] and the euro is recovering against the dollar."
Supply jitters
At Barclays Capital Inc., London, analysts said "Chevron announced [June 23] that it was shutting in all onshore operations in Nigeria as a result of last week's attack on the Abiteye-Olero crude oil pipeline. Compounding the producer's problems was news that Pengassan, the senior Nigeria oil workers union, had declared a work stoppage at Chevron's facilities pending further negotiations with government over the conduct of management. With Shell having declared force majeure for June and July on exports from its Bonga oil field (220,000 b/d) last week, and Chevron usually producing close to 350,000 b/d onshore, supply disruptions in Nigeria clearly more than offset the 200,000 b/d increase" promised by Saudi Arabia.
However, Jakob at Petromatrix said the "agitation" between Nigerian office workers and Chevron officials "has been lasting for so long now, with a series of nonapplied threats, that it starts to look more and more like the union is looking for a face-saving way out of this conflict."
In other news, Raymond James analysts said, "Iran has denied a rumor of a [June 23] strike on its nuclear facilities by Israel. Former US ambassador to the United Nations John Bolton said he believes Israel is likely to attack Iran in the time between the November presidential election in the US and the inauguration of the new president."
Jakob said, "The European Union has decided to impose new sanctions on Iran by curbing travel for certain Iranians and freezing some banking assets. The carrot and the stick approach continues as on the same day the US administration leaked to the press that it was debating opening a US diplomatic interest section in Teheran. In order to do this without the administration appearing to the public as capitulating would probably need to be accompanied by another toughening of sanctions."
Weakening demand
Jacques H. Rousseau, an analyst at Soleil-Back Bay Research, lowered second quarter earnings estimates for the refiners he follows and expects other analysts to do the same in coming weeks based on "expectations for lower production volumes; higher costs and weaker refining margin realizations (capture rates)." He said, "Weak demand remains the primary problem in the sector, as the seasonal summer rise of gasoline consumption has yet to materialize. Over the past 4 weeks, gasoline demand is 1.8% below year-ago levels, on average, according to the Energy Information Administration. We expect this negative trend to continue in the coming weeks."
Analysts at Pritchard Capital Partners LLC, New Orleans, said, "Even though basis levels for diesel are weakening throughout the country, the strong heating oil price makes it more economical for refiners to produce more distillate than gasoline. However, the high retail price of diesel is slowing down demand, and as a result, supplies are building."
Jakob said, "In the end, crude oil is still a refinery feedstock, and refineries in the Atlantic Basin have currently little incentive to run on negative economics for a demand that is not there."
Meanwhile, Barclays Capital analysts said the recent hike in China's retail oil prices will not necessarily trigger a major decrease in world demand for crude. "Historical hikes in China's benchmark retail gasoline prices have not produced clear and consistent negative demand responses—if anything, the price hike last November was followed by demand growth in the subsequent 3 months," they said.
Higher retail prices may choke off some demand in China, but it will also improve margins for refiners that "could instead lead to a slight increase in effective demand, depending on the severity of the initial shortages. Over the longer term, the primary determinant of oil demand is the underlying rate of economic growth (and not prices)," the analysts said.
Moreover, they said, since 1960, per capita income in China "has grown by over 6,000% and that in India by over 1,500%, while real crude oil prices have increased by a much smaller 767%."
Barclays analysts said, "To put that into perspective, the cost of a barrel of crude, adjusted for inflation, made up roughly 15% of an average person's income in China in 1960, over 37% during the oil price shock of the late 1970s, and just 1.4% in 2007. This means that as far as purchasing power is concerned, the Chinese consumer is not yet in as much pain as some reports have portrayed, despite record high prices. Looking forward, the big picture is one of very low oil consumption per capita in emerging Asia—approximately 6 b/d in China and 2.5 b/d in India, compared with 50 b/d in Taiwan and South Korea—and the potential for this to rise along with incomes remains enormous."
Energy prices
The new front-month August contract for benchmark US sweet, light crudes advanced by $1.38 to $136.74/bbl June 23 on the New York Mercantile Exchange. The September contract gained $1.48 to $137.14/bbl. On the US spot market, West Texas Intermediate at Cushing, Okla., was up $1.37 to $136/bbl. Heating oil for July increased 2.47¢ to $3.80/gal on NYMEX. The July contract for reformulated blend stock for oxygenate blending (RBOB) rose 1.59¢ to $3.46/gal.
The July natural gas contract escalated by 20.9¢ to $13.20/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., gained 13.5¢ to $12.94/MMbtu.
In London, the August IPE contract for North Sea Brent crude increased $1.05 to $135.91/bbl. The July gas oil contract was up $11 to $1,244/tonne.
The average price for the Organization of Petroleum Exporting Countries' basket of 13 reference crudes jumped by $2.14 to $130.70/bbl on June 23.
Contact Sam Fletcher at [email protected]
