MARKET WATCH: Georgia conflict lifting oil price from 3-month low

The front-month oil price fell 7.9% last week to a 3-month low Aug. 8 as the US dollar strengthened, but energy prices rebounded above $116/bbl in after-hours electronic trade as Russia expanded its military campaign in Georgia.

Sam Fletcher
Senior Writer

HOUSTON, Aug. 11 -- The front-month crude price fell 7.9% last week to a 3-month low Aug. 8 as the US dollar strengthened, but energy prices rebounded above $116/bbl in after-hours electronic trade as Russia expanded its military campaign in Georgia.

Olivier Jakob at Petromatrix, Zug, Switzerland, observed, "West Texas Intermediate spent most of [last] week in the defense of the $120/bbl support, but a surge in the dollar late in the week was the final blow to a market that was already under liquidation risk." The benchmark US crude lost $9.90/bbl on the New York market during the week, while in London, North Sea Brent was down $10.85/bbl. Reformulated blend stock for oxygenate blending (RBOB) dropped $8.30/bbl during the same period, and heating oil fell $12.97/bbl. "Natural gas was lower by 12%," said Jakob.

Analysts in the Houston office of Raymond James & Associates Inc. said, "While not a large oil producer itself, Georgia is part of a southern energy corridor that connects the Caspian Sea region with world markets." On Aug. 5, the Baku-Tbilisi-Ceyhan pipeline, which transports oil from the Azeri-Chirag Gunashli oil fields to Turkey, was closed by an explosion and fire at a pump station near Refahiye in the eastern part of that country (OGJ Online, Aug. 8, 2008). BP PLC said it reduced production at the fields but didn't give specific numbers. Other sources said 400,000-600,000 b/d of production were shut in at the Azeri-Chirag Gunashli oil fields because of the fire.

Kurd rebels claimed responsibility for the pump station explosion in Turkey, but Russian jets were reported to have fired more than 50 missiles in an unsuccessful raid on the BTC pipeline in Georgia over the weekend. There were other reports that oil shipments from the ports of Batumi and Kulevi in Georgia were delayed over the weekend.

In New Orleans, analysts at Pritchard Capital Partners LLC said, "Fears for the pipeline are growing in the West after Russian armor entered the South Ossetia region late last week, and Russian artillery and jets attacked targets in Georgia in response to an attempt by Georgian troops to rein in the province. Western observers also voiced fears that Moscow would take advantage of the conflict in Georgia to extend its control over oil resources in the area of the former Soviet Union." The BTC with its 1 million b/d capacity is the only pipeline exporting oil from the Caucasus region to the West that does not pass through Russian territory.

Most of that oil goes to Europe. Energy Business Reports near Phoenix, Ariz., said Europe's fuel consumption patterns are changing, with demand for middle distillates outpacing any other major petroleum product. This is partly the result of strong demand for diesel-fueled passenger vehicles, particularly in Western Europe where gasoline demand has plummeted for 7 years, producing surpluses of gasoline and blended stocks. Poor profit margins have dried up investments in refinery upgrades to process other crudes even as North Sea production diminishes.

Energy prices
The September contract for benchmark US light, sweet crudes traded as low as $114.62/bbl before rallying to close at $115.20/bbl Aug. 8, down $4.82 for the day on the New York Mercantile Exchange. The October contract fell $4.38 to $115.40/bbl. On the US spot market, WTI at Cushing, Okla., was down $4.82 to $115.20/bbl. Heating oil for September delivery dropped 10.56¢ to $3.13/gal on NYMEX. The September RBOB contract lost 11.53¢ to $2.89/gal.

The September natural gas contract tumbled 32.3¢ to $8.25/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., fell 52¢ to $8.22/MMbtu. Meanwhile, Raymond James analysts said, "With natural gas production from publicly-traded companies up 6.7% [vs. a year ago] the second quarter mirrored the robust US gas production growth curve we've seen since mid-2007. We believe the primary factor behind this growth has been stronger productivity from the rapidly growing onshore resource plays (i.e., Barnett shale, etc.), temporarily overcoming the declining initial well productivity trends of core US supply over the past decade. While the start-up of the Independence Hub last year is serving to temper the historical declines out of the Gulf of Mexico, the downtime at the Hub for much of the second quarter clearly shows that core supply is what is principally driving overall domestic growth."

In London, the September IPE contract for North Sea Brent crude dropped $4.53 to $113.33/bbl. Gas oil for August renewed its downward spiral, losing $37.75 to $1,019.75/tonne.

The average price for the Organization of Petroleum Exporting Countries' basket of 13 reference crudes dropped $2.35 to $112.73/bbl on Aug. 8. So far this year, the OPEC basket price has averaged $109.44/bbl.

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