MARKET WATCHCombat rumors blast crude price above $68/bbl

Crude futures prices jumped by more than $5, topping $68/bbl in overnight electronic trading on the New York market amid false rumors of military action involving Iran.

Sam Fletcher
Senior Writer

HOUSTON, Mar. 28 -- Crude futures prices jumped by more than $5, topping $68/bbl in overnight electronic trading on the New York market amid false rumors of military action involving Iran.

Rumors of an Iranian missile attack on a US ship and of a UK attempt to free 15 sailors and marines held by Iran's Revolutionary Guard pushed energy prices to $68.09/bbl in New York and to $69/bbl for North Sea Brent in London. It marked the biggest 1-day change in crude futures prices since December 2001.

As a result of that price spike, "risk managers will be forced to rerun their stress test scenario, and they will need to use something more aggressive than a $5/bbl overnight increase," said Olivier Jakob, managing director of Petromatrix GMBH, Zug, Switzerland. "This should force the shorts [futures traders with a net excess of open sales over open purchases] into some rethink on their margin call provisions. The combination of current military activity and current tensions in the Persian Gulf leave little risk-reward [benefits] in keeping an overnight short position and this should for now lead to stronger short covering towards close of business," he said.

Oil prices retreated from the overnight spike but were "still up significantly" in early trading Mar. 28, "which may prompt energy stocks to trade higher," said analysts in the Houston office of Raymond James & Associates Inc.

The probable cause of the rumors was the start of a previously scheduled US Navy exercise in the Persian Gulf involving more than 100 aircraft and 15 vessels. "The recently deployed military hardware in the Persian Gulf is not training to hunt for Al-Quaeda and with the tit-for-tat between the US and Iran, these large military maneuvers targeted at Iran, while the UK sailors are still captive, can only keep oil markets edgy," said Jakob.

Meanwhile, the UK Ministry of Defense offered proof that the anchored British vessel was "ambushed" by naval units of Iran's Revolutionary Guard 1.7 nautical miles inside Iraqi waters (OGJ Online, Mar. 27, 2007). "Initial coordinates provided by Iran itself showed the ship was in Iraqi territory. Upon noticing this, Iran then provided a second 'revised' set of coordinates, which then conveniently placed the vessel in Iranian waters," Raymond James analysts said.

In an address to the House of Commons, UK Prime Minister Tony Blair said it was time to "ratchet up" diplomatic and international pressures on Iran. Meanwhile, the UK has suspended all other official business with Iran until the current crisis is resolved. There has not yet been any disruption of Iran's exports of 2.2 million b/d of crude.

In other news, Raymond James analysts reported workers in France agreed to continue a 2-week strike at the Port of Marseille that has forced two refineries to cut output by about a third.

US inventories
The Energy Information Administration reported Mar. 28 commercial US crude inventories fell 900,000 bbl to 328.4 million bbl during the week ended Mar. 23. Gasoline stocks dipped by 300,000 bbl to 210.2 million bbl during the same period. Distillate fuel inventories decreased 700,000 bbl to 118 million bbl, with heating oil accounting for most of the decline while diesel fuel remained relatively unchanged. Propane and propylene inventories also were down by 700,000 bbl, to 25.2 million bbl last week.

Imports of crude into the US declined by 786,000 b/d to 9.6 million b/d during the same week. However, input of crude into US refineries increased by 167,000 b/d to 15 million b/d, with facilities operating at 87% of capacity. Gasoline production increased slightly to 8.9 million b/d, while distillate fuel production decreased to 4 million b/d.

Energy prices
The May contract for benchmark US light, sweet crudes continued to climb for the fifth consecutive session, inching up 2¢ to $62.93/bbl during regular floor trading Mar. 27, the highest settlement since Dec. 20 on the New York Mercantile Exchange. The June contract increased 13¢ to $64.65/bbl. On the US spot market, West Texas Intermediate at Cushing, Okla., was up 2¢ to $62.94/bbl. Heating oil for April delivery gained 1.03¢ to $1.79/gal. The April contract for reformulated blend stock for oxygenate blending (RBOB) rose 0.53¢ to $2.07/gal.

"Gasoline production capacity remains curtailed on both sides of the Atlantic Basin and with the [NYMEX] gasoline contract expiry falling [on Mar. 30] we need to watch for potential further strength coming from the gasoline pool," Jakob said.

The April natural gas contract jumped by 24.9¢ to $7.50/MMbtu on NYMEX. On the US spot market, natural gas at Henry Hub, La., gained 2¢ to $7.15/MMbtu. "On the natural gas side, cooler weather in the Northeast (as well as expectations of a warmer-than-normal summer) is pushing prices up," Raymond James reported.

In London, the May IPE contract for North Sea Brent crude increased 19¢ to $64.60/bbl. Gas oil for April delivery inched up 50¢ to $554.75/tonne.

The average price for the Organization of Petroleum Exporting Countries' basket of 11 benchmark crudes rose by 37¢ to $60.37/bbl on Mar. 27.

Contact Sam Fletcher at samf@ogjonline.com.

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