MARKET WATCHGeopolitical worries pump up energy prices

Jan. 23, 2006
Energy prices escalated Jan. 20, with the front-month crude futures contract hitting a 4-month high on the New York market.

Sam Fletcher
Senior Writer

HOUSTON, Jan. 23 -- Energy prices escalated Jan. 20, with the front-month crude futures contract hitting a 4-month high on the New York market amid traders' despair that a Western confrontation with Iran over its nuclear program could threaten supplies.

"Iran is rapidly becoming the most important noneconomic influence on the oil market today," said analysts Jan. 23 at the Houston office of Raymond James & Associates Inc. "The ongoing nuclear tensions are unnerving the market and carry with them the real possibility of a military confrontation at some point in the foreseeable future. While this risk does not appear imminent, we do think it will likely come to a head in the next 6-18 months."

The Raymond James analysts said "the odds have increased greatly" for an Iranian-related oil-supply interruption in the next 2 years.

They warned, "We have to remain mindful of other wildcard countries, as well: Saudi Arabia, Russia, Nigeria, Venezuela, and Iraq. While the risk of each of these individual oil supply disruptions is low, in the aggregate the oil market is facing what may be an unprecedented combination of potential risk factors. Combined with another paradigm shift—the almost total lack of excess production capacity—this is catalyzing prices to move higher despite high oil inventories. In other words, the market has recognized that there is virtually no room for error in the global supply picture."

Paul Horsnell of Barclays Capital Inc., London, in a Jan. 19 report said, "While the Iranian issue holds the greatest dangers going forward, it has been the more immediate problems in Nigeria that have been the key market driver over the past week." Royal Dutch Shell PLC shut in production of 221,000 b/d of crude after attacks by militants on its facilities in Nigeria (OGJ Online, Jan. 20, 2006).

"Low-level violence with more severe incidents on occasions has long been a feature of the usual flow of events in the Niger delta," Horsnell said. "However, we believe events over the past week represent a significant break with the previous pattern. The actions of the group that attacked the EA field [off Warri in Delta State], took hostages, attacked pipelines and the Benisede pumping station does not seem to fit the usual modus operandi of previous groups."

Recent attacks "suggest that the most active group is better organized, more ambitious, perhaps more broadly based in local political terms, more heavily armed, and is hence a more dangerous proposition than its predecessors," he said. "There is a very significant escalation involved in the move from the occupation of onshore pumping stations by villagers motivated by local issues to attacks on offshore facilities using speedboats, causing significant loss of life and pursuing a broader and more intractable set of demands."

Hurricane damage
Hurricanes Katrina and Rita were "the greatest natural disasters to oil and gas development in the history of the Gulf of Mexico," and full production probably will not be restored before the start of the 2006 hurricane season next summer, said Chris Oynes, regional director of the US Minerals Management Service in New Orleans. He said 255,000 b/d of crude and 400 MMcfd of natural gas production will likely remain shut in until then.

Assessment of storm damage to pipelines and other offshore facilities is still under way 5 months after Hurricane Katrina hit the Gulf Coast. "It is likely that additional damage will be reported as underwater damage assessments are completed. These have been delayed because of overwhelmed support resources, such as diving equipment, support vessels, and remotely operated vehicles," Oynes said.

Katrina destroyed 46 platforms and damaged 20 others. MMS received reports of damage to 100 pipelines, resulting in 211 minor pollution incidents, each involving less then 500 bbl of oil that did not reach the coast. MMS reported 12 of the 36 large diameter (10 in. or larger) damaged by Katrina have since returned to service.

Rita destroyed 69 platforms and damaged 32 others. There were reports of 83 damaged pipelines and 207 minor pollution incidents in Rita's wake. Of the 28 large diameter pipelines damaged by that storm, 10 have returned to service.

Energy prices
The February contract for benchmark US light, sweet crudes jumped by $1.52 to $68.35/bbl Jan. 20 on the New York Mercantile Exchange. The March contract escalated by $1.29 to $68.48/bbl. On the US spot market, West Texas Intermediate at Cushing, Okla., was up by $1.52 to $68.36/bbl.

Heating oil for February delivery climbed by 7.03¢ to $1.88/gal on NYMEX. Gasoline for the same month increased by 4.1¢ to $1.82/gal. The February natural gas contract gained 37.5¢ to $9.28/MMbtu as it "followed crude oil prices higher on continued geopolitical anxieties ahead of the weekend," said analysts at Enerfax Daily.

In London, the March contract for North Sea Brent crude advanced by $1.04 to $65.23/bbl on the International Petroleum Exchange. However, gas oil for February lost $2.25 to $546.25/tonne.

The average price for the Organization of Petroleum Exporting Countries' basket of 11 benchmark crudes gained $1.13 to $60.39/bbl on Jan. 20.

Contact Sam Fletcher at [email protected].