MARKET WATCHCrude prices rise with Saudi Arabia attack

Feb. 27, 2006
April crude futures prices jumped during trading Feb. 24 in New York after Saudi security forces foiled a suicide attack at Abqaiq.

Sam Fletcher
Senior Writer

HOUSTON, Feb. 27 April crude futures prices jumped above $63/bbl during trading Feb. 24 in the New York market after Saudi Arabian security forces foiled a suicide attack on the kingdom's Abqaiq production and processing center.

That heavily guarded facility in eastern Saudi Arabia processes two thirds of the country's oil before it is exported. Guards fired on the attackers in two cars, detonating the vehicles and killing the attackers (OGJ Online, Feb. 24, 2006). Officials said there was no damage to the facility or disruption of operations.

Abqaig is the "most sensitive target of all" in the Persian Gulf, said Paul Horsnell of Barclays Capital Inc., London. "It is that aspect rather than any belief that the attack had a significant chance of success that has perhaps proved the most unsettling from a market perspective."

Political problems 'swarm'
Several geopolitical problems "arrived in a swarm" last week, Horsnell said. "The situation in the Nigerian oil industry worsened significantly, Iraq took a quicker step down the path of disintegration and insecurity of exports, and there was a foiled attack on the most important single facility within the global oil industry. That represents a major demonstration and escalation of risks."

Yet the April contract for benchmark US light, sweet crudes was up by only $1.62/bbl over the week on the New York Mercantile Exchange, Horsnell noted. "Unhedged money appears to be content that increases in US inventories [of crude and gasoline] compensate for risks. In our view, more global spare capacity would achieve that end, but US inventories appear to be a poor substitute," he said.

Despite the attack in Saudi Arabia, Horsnell still views Nigeria as "the most important of the geopolitical elements." Royal Dutch Shell PLC has already shut in Nigerian production totaling 455,000 b/d following recent kidnappings of workers and rebel attacks on oil facilities in the Niger Delta (OGJ Online, Feb. 21, 2006). "It is not obvious to us that there is much effective defense available should rebel groups decide to attack further facilities. If that becomes perceived as the case within the region, it is then also not clear to us how company operations can be maintained at current levels," Horsnell said.

He noted a recent ruling by a Nigerian court requiring oil companies to pay $1.5 billion to Ijaw areas as compensation for environmental damage. "Although that payment is one rebel demand, their aspirations appear to run further than that issue alone," Horsnell said. "Nigeria looks set to be a source of volatility for a while to come yet."

Meanwhile, the "accelerating disintegration" of Iraq "raises questions as to the security and even the future legal basis of exports in a situation of central collapse," Horsnell said. "It is also likely to lead to yet more delays in the timeline for any recovery of Iraqi output, and to further short-term declines related to the investment drought and lack of organization."

Iran's "prototype deal" with Russia over the weekend to establish a joint uranium enrichment venture marks a breakthrough in talks on a US-backed Kremlin proposal aimed at easing concerns that Tehran wants to build nuclear weapons. That "might provide unhedged money with another chance to sell. It also provides Europe and the US with a potential opportunity to draw a veil over the issue, but we still rather doubt that that option will be taken," said Hosrnell.

Energy prices
The April contract of benchmark US crudes traded as high as $63.25/bbl Feb. 24 on NYMEX before closing at $62.91/bbl, up $2.37 for the day. The May contract gained $2.10 to $64.14/bbl. On the US spot market, West Texas Intermediate at Cushing, Okla., shot up by $4.19 to $62.52/bbl. Heating oil for March delivery jumped by 6.41¢ to $1.73/gal on NYMEX. Gasoline for the same month increased by 3.72¢ to $1.55/gal.

The expiring March natural gas contract fell by 34.6¢ to $7.11/MMbtu Feb. 24 on NYMEX. The April gas contract was down by 23¢ to $7.31/MMbtu. "Forecasters expect March through May to average colder than normal in the northeastern states," said analysts at Enerfax Daily.

"Natural gas prices held fairly steady for the week as colder-than-normal temperatures set in across much of the Midwest and Northeast heading into this past weekend and which are expected to persist through this week," said Robert S. Morris at Banc of America Securities LLC, New York. The recent drop in natural gas prices has prompted some US fertilizer facilities to restart or ramp up production, he said.

"Nonetheless, natural gas storage levels will almost certainly end the winter at an all-time high, which we believe, once temperatures moderate, likely portends further downside to natural gas prices over the next few months," said Morris.

In London, the April IPE contract for North Sea Brent crude escalated by $2.06 to $62.60/bbl. The March gas oil contract gained $12.25 to $540.75/tonne.

The average price for the Organization of Petroleum Exporting Countries' basket of 11 benchmark crudes increased by $1.06 to $56.24/bbl on Feb. 24. So far this year, OPEC's basket price has averaged $57.52/bbl, up from an average price of $50.64/bbl for all of 2005.

Contact Sam Fletcher at [email protected].