MARKET WATCHPolitical tension pushes crude prices to record highs

Sam Fletcher
Senior Writer

HOUSTON, Apr. 19 -- International political tensions catapulted crude futures prices to record highs above $71/bbl in the US and $72/bbl in British markets on Apr. 18.

"Natural gas and oil both had a good run," said J. Marshall Adkins in the Houston office of Raymond James & Associates Inc. "We do expect that commodity prices may pull back slightly," he said. "However, we continue to think that geopolitical risks will keep oil prices up and that strength in commodities will benefit the energy stocks."

Edmund Daukoru of Nigeria, president of the Organization of Petroleum Exporting Countries, blamed "threatening statements" against Iran over its nuclear program for driving up energy prices. For weeks now, the US and Europe have pushed the United Nations Security Council to impose sanctions against Iran for its refusal to curb its nuclear program.

But some analysts claim the gasoline market is pushing up crude prices amid fears the industry might miss its May deadline for switching from methyl tertiary butyl ether to ethanol as a gasoline additive. That change is adding to the cost while residual damage to three US refineries from last year's hurricanes is restricting production of gasoline in the face of still strong demand, analysts said.

Input of crude into US refineries increased by 146,000 b/d to 14.7 million b/d, with refineries operating at 86.2% of capacity during the week ended Apr. 14.

The Energy Information Administration said Apr. 19 commercial US crude inventories dipped by 800,000 bbl to 345.2 million bbl during the same period, still "well above the upper end of the average range for this time of year." Gasoline stocks dropped by 5.4 million bbl to 202.5 million bbl in the week ended Apr. 14, while distillate inventories fell by 2.8 million bbl to 114.6 million bbl. US imports of crude increased by 126,000 b/d to 9.7 million b/d in the same period. However, EIA said, crude imports have averaged 9.8 million b/d over the past 4 weeks, a decrease of 310,000 b/d vs. the same period a year ago.

Energy prices
The May contract for benchmark US light sweet crude shot up to $71.60/bbl during Apr. 18 trade before closing at a record $71.35/bbl, up 95¢ for the day, on the New York Mercantile Exchange. The June contract gained $1.11 to $73.09/bbl, and the NYMEX crude market remained in contango, with each monthly contract priced progressively higher through December. On the US spot market, West Texas Intermediate at Cushing, Okla., was up by 95¢ to $71.36/bbl.

Gasoline for May delivery escalated by 5.42¢ to $2.22/gal on NYMEX. Heating oil for the same month increased by 2.79¢ to $2.05/gal. The May natural gas contract climbed by 43.1¢ to $8.01/MMbtu on NYMEX, following the crude market's surge. The gas futures market is in contango through January 2007.

In London, the May IPE contract for North Sea Brent crude gained $1.05 to a record $72.51/bbl. The May gas oil contract increased by $11.75 to $627.50/tonne.

The average price for OPEC's basket of 11 benchmark crudes was up by 78¢ to $65.80/bbl on Apr. 18.

Natural gas outlook
Adkins earlier noted: "Natural gas prices worldwide have been steadily moving upward at a pace comparable to that in the US. This is an indication that increasing international trade in gas—both in the form of LNG and via pipelines—is creating, slowly but surely, a single global gas market. While such a market does not yet exist, progress towards it is consistently being made. As gas becomes a globally traded commodity, competition for this finite resource between major gas consumers—the US, the European Union, Japan, China, and others—is bound to increase, with gas likely being linked to oil at a 6:1 btu parity price ratio. This would be bullish for gas prices not only here at home, but around the world."

Meanwhile, EIA recently reduced its forecasts for US LNG imports to 770 bcf in 2006 from an earlier estimate of 830 bcf and to 970 bcf in 2007 from 1.03 tcf. The agency also reduced its projection for US gas production, which fell 2.8% in 2005 due to hurricane-related shutdowns. It now calls for an increase of 1.8% in 2006, down from 2.2% previously, and an increase of 1.1% in 2007, down from 1.7%.

EIA has forecast US gas consumption will fall by 200 MMcfd, or 0.9% in 2006 but will increase by 700 MMcfd, or 3.4%, in 2007.

Contact Sam Fletcher at [email protected].