MARKET WATCHThreat to Persian Gulf supplies lifts crude prices

Sam Fletcher
Senior Writer

HOUSTON, June 6 -- Energy prices continued to climb June 5 as Iran's supreme leader, Ayatollah Ali Khamenei, threatened to disrupt Persian Gulf oil supplies if the US attacks Iran.

He warned that the US and its allies could not protect crude shipments from various Middle East suppliers through the Hormuz Strait (OGJ Online, June 5, 2006). Some 16 million b/d, 20% of the world's total crude supply, passes through the strait. Meanwhile, Iranian President Mahmoud Ahmadinejad said over the weekend that his government would consider the incentives proposed by the US, UK, Germany, France, China, and Russia to get Iran to give up its uranium enrichment program that could produce uranium for nuclear weapons.

Hurricane outlook
The US Minerals Management Service reported 71 platforms in the Gulf of Mexico were still idle June 1 because of infrastructure damage caused by Hurricanes Katrina and Rita last year. MMS said 227,888 b/d of crude were still shut in on federal leases in the gulf, 15.2% of the normal daily production from those waters. Officials said 1.1 bcfd of natural gas, 11% of daily production, also were shut in. Production lost Aug. 26-June 1 totaled 162.4 million bbl of crude and 784.5 bcf of gas, 29.7% and 21.5%, respectively, of annual production from federal leases in the gulf.

"We believe that much of this [shut-in crude and gas production] will be gone permanently," said analysts June 5 in the Houston office of Raymond James & Associates Inc. "This year's hurricane season is predicted to be another higher-than-average event, and we anticipate rekindling of shut-ins and upward movement in natural gas prices if severe storms do pass over the gulf."

However, weather experts at Colorado State University recently said the west and central sections of the Gulf of Mexico should be spared the brunt of hurricane activity this year with currents pushing storms toward Florida and the US East Coast.

Natural gas outlook
Cambridge Energy Research Associates (CERA) this week cited "real potential for an abrupt decrease in gas prices" before fall as some US gas storage fields reach their limits and are unable to take additional injections.

"Absent a warmer-than-normal summer or significant gas supply disruptions by hurricanes, CERA expects the Oct. 31 North American gas storage inventory level to reach 4.2 tcf, a more than 95% fill of expected working gas storage capacity," the group said. "Given end-of-cycle physical limitations on injections and expected average September and October storage injections approximately equaling injection capability, CERA expects some storage fields, especially in the US East region, will not be able to accommodate additional injections."

The lack of storage to accommodate all of the gas available for injection "is likely to lead to a sharp and swift drop in spot gas prices," said CERA Director Ken Yeasting. "As gas prices fall toward $5/MMbtu, displacement of coal-fired generation by gas-fired generation will provide additional demand and thus support gas prices and rebalance the market."

The coal-fired units most likely to be displaced would be older, inefficient eastern coal plants burning high-cost Appalachia coal without emission control equipment in markets where prices for sulfur dioxide emissions allowances are relatively high, Yeasting said.

Energy prices
The July contract for benchmark US sweet, light crudes gained 27¢ to $72.60/bbl June 5 on the New York Mercantile Exchange. The August contract climbed by 31¢ to $73.34/bbl. On the US spot market, West Texas Intermediate at Cushing, Okla., was up by 27¢ to $72.60/bbl. Heating oil for July delivery increased by 2.82¢ to $2.04/gal on NYMEX. Gasoline for the same month, however, lost 3.33¢ to $2.16/gal. The July natural gas contract dropped 16¢ to $6.43/MMbtu.

In London, the July IPE contract for North Sea Brent crude increased by 34¢ to $71.37/bbl. The June gas oil contract gained $6.75 to $634.50/tonne.

The average price for the Organization of Petroleum Exporting Countries' basket of 11 benchmark crudes jumped by $1.47 to $66.48/bbl on June 5. So far this year, OPEC's basket price has averaged $60.65/bbl.

Contact Sam Fletcher at [email protected].