MARKET WATCH: Crude tops $120/bbl as dollar weakens

Crude prices soared above $120/bbl Aug. 21 for the first time in 2 weeks, gaining over three consecutive trading sessions as both the US dollar and US-Russian relations deteriorated.

Aug 22nd, 2008

Sam Fletcher
Senior Writer

HOUSTON, Aug. 22 -- Crude prices soared above $120/bbl Aug. 21 for the first time in 2 weeks, gaining over three consecutive trading sessions as both the US dollar and US-Russian relations deteriorated.

In the Houston office of Raymond James & Associates Inc., analysts suggested "a new Cold War" may be "heating up the oil market," with the front month contract up nearly $6/bbl—"the biggest jump in 3 months"—in the New York market due to US opposition to Russia's incursion into nearby Georgia.

"Crude oil futures spiked [Aug. 21] as the US dollar fell and money poured into commodities," said analysts at Pritchard Capital Partners LLC, New Orleans. By early Aug. 22, however, the dollar appeared to have "solidified" against the Japanese yen and strengthened against the euro.

At Petromatrix in Zug, Switzerland, Oliver Jakob noted ironically Aug. 21, "Ten days ago, the Baku-Tbilisi-Ceyhan oil pipeline was on fire, bombs were falling on Georgia, the US [crude] stocks were reported lower than expected, but the price of oil was moving down. Today the BTC pipeline is repaired, no shots are fired in Georgia, the US stocks are reported higher than expected, but the price of oil is moving up. The difference between then and now is of course the directional move of the Dollar Index and assets allocation linked to it. [On Aug. 21], the Dollar Index suffered a strong retreat and led to an Olympic race across the commodity boards." BP PLC, operator, said shipments of Azeri crude would resume via the BTC pipeline next week (OGJ Online, Aug. 21, 2008).

Moreover, Jakob said, "We do not buy the argument that explains [Aug. 21]'s [price] move by 'geopolitical concerns.' Russia has taken care not to bomb the BTC pipe in its Georgian intrusion, and it has enough leveraged arguments to use against the West (northern access to Afghanistan, veto on 'Iranium') not to have to use the oil tool." He added, "The US envoy to the North Atlantic Treaty Organization claims that on the eve of the Georgian assault on Ossetia, [western officials] were again telling them not to do it as they would fall into a Russian trap. Georgia apparently did not listen, and despite all the current face saving, not all NATO nations are extremely happy to have been thrown in the trap and put their relations with Moscow at risk of this uncontrolled adventure."

Meanwhile, Russia has suspended military cooperation with NATO due to the dispute over its incursion into Georgia.

In other news, some analysts are projecting the Organization of Petroleum Exporting Countries will increase crude production by 450,000 b/d to 32.95 million b/d this month, primarily due to higher output from Iran and Angola. However, some OPEC price hawks such as Venezuela are pushing for a production cut at the group's Sept. 9 meeting.

Mexico's Petroleos Mexicanos reported its crude production and exports fell in July as output from its primary Cantarell oil field continues to decline. Pemex production was down to 2.782 million b/d that month from 2.839 million b/d in June. Its crude exports declined to 1.377 million b/d from 1.415 million b/d, officials said. As a result, the company recently revised its projected 2008 production level to 2.8 million b/d, down from an initial goal of 3 million b/d. Officials said Mexican production dropped 10% in the first 7 months of 2008, with exports down 16.3% in the same period.

China's oil demand growth hit a 2-year high in July as it prepared to host the summer Olympics, with "implied consumption" up 9.5% from a year earlier. However, observers report China's imports of oil products will drop sharply after the games end.

Tropical Storm Fay continued to drift westward across northern Florida, triggering more flooding in that state Aug. 22. A tropical storm watch remained in effect from Destin, Fla., to the Mississippi and Alabama border.

Energy prices
The new front-month October contract for benchmark US light, sweet crudes jumped by $5.62 to $121.18/bbl Aug. 21 on the New York Mercantile Exchange. The November contract escalated by $5.69 to $121.72/bbl. On the US spot market, West Texas Intermediate at Cushing, Okla., was up $5.95 to $120.93/bbl. Heating oil for September climbed by 13.71¢ to $3.30/gal on NYMEX. The September contract for reformulated blend stock for oxygenate blending (RBOB) gained 13.49¢ to $3.05/gal.

The September natural gas contract jumped 17.5¢ to close at $8.25/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., was up 3.5¢ to $8.06/MMbtu. "Despite receiving what was seen by many as a bearish 88 bcf injection report into underground natural gas storage for the week ended Aug. 15, September natural gas futures jumped higher [Aug. 21] as crude futures skyrocketed and uncertainty about Tropical Storm Fay's path increased," Pritchard Capital analysts reported. "As the injection number was released, the front-month contract knee-jerked to a $8.015/MMbtu low before rocketing higher."

Raymond James analysts said, "[Gas] prices continue to swing in the same direction as oil, as [Aug. 21]'s bearish injection was overlooked and gas prices rallied with crude. Over the next 1-2 years, we see this relationship decoupling as the bearish supply-demand fundamentals for natural gas manifest."

In London, the October IPE contract for North Sea Brent crude advanced by $5.80 to $120.16/bbl. Gas oil for September shot up $65.50 to $1,069.50/tonne.

The average price for OPEC's basket of 13 reference crudes increased $3.86 to $113.63/bbl on Aug. 21.

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