MARKET WATCHMiddle East fighting boosts oil prices

Sam Fletcher
Senior Writer

HOUSTON, July 13 -- Energy prices continued to climb July 12 as Israel's incursion into southern Lebanon fanned fears of possible disruption of Middle Eastern crude supplies.

Israel bombed Beirut's airport and imposed a naval blockade after Hezbollah militants kidnapped two Israeli soldiers in a border raid. "In conjunction with violence in the Gaza Strip (precipitated by the capture of another Israeli soldier last month), Israel is now fighting a de facto war on two fronts," said analysts in the Houston office of Raymond James & Associates Inc.

Meanwhile, frustrated by Iran's reluctance to respond to an incentive package, the European Union, China, Russia, and the US have united on a United Nations Security Council resolution that requires Iran to halt its uranium enrichment program.

"Prospects of regional war in the Middle East, pipeline explosions in Nigeria, and more resilience out of Iran for its nuclear pursuit are all pushing oil to new highs," said Raymond James analysts. Although current violence does not threaten any oil production, the possibility that the violence might spread is adding to the geopolitical risk premium, they said.

The Raymond James analysts noted that front-month crude futures hit a record high of $75.89/bbl in early trading July 13 in the New York market, surpassing the July 7 record of $75.78/bbl. "While this is certainly bullish for energy markets, oil at these prices may promote further inflation fears, which could have a negative impact on the broader market," they said.

In other news, the US Department of Energy reported US imports of oil from Venezuela fell by 6% during the first 4 months of 2006 as Petroleos de Venezuela SA shipped more crude and fuel to India and China. Those markets are seven times farther away than the US, so the increased transportation cost reduces Venezuela's income by $3/bbl, analysts reported. However, record high crude prices help compensate for that loss. The change is part of President Hugo Chavez's plan to find new markets for Venezuela's crude.

Energy prices
The August contract for benchmark US light, sweet crudes climbed by 79¢ to $74.95/bbl July 12 on the New York Mercantile Exchange. The September contract escalated by 83¢ to $76.06/bbl. On the US spot market, West Texas Intermediate at Cushing, Okla., was up by 79¢ to $74.95/bbl. Regular gasoline for August delivery gained 6.34¢ to $2.26/gal on NYMEX. Heating oil for the same month increased by 0.78¢ to $2.02/gal.

The August natural gas contract advanced by 14.9¢ to $5.78/MMbtu. The Energy Information Administration reported July 13 the injection of 89 bcf of gas into US underground storage during the week ended July 7. That was above the consensus of Wall Street analysts for what is usually one of the highest injection weeks of the year because of the Fourth of July holiday. It compared with injections of 73 bcf the previous week and a revised injection of 92 bcf during the same period a year ago. US gas storage now exceeds 2.7 tcf, which is 426 bcf more than year-ago levels and 581 bcf above the 5-year average.

In London, the August IPE contract for North Sea Brent crude was up by 72¢ to $74.39/bbl. The July contract for gas oil was unchanged at $637/tonne.

The average price for the Organization of Petroleum Exporting Countries' basket of 11 benchmark crudes gained 56¢ to $68.66/bbl July 12.

Contact Sam Fletcher at [email protected].