MARKET WATCHTensions in Iran put crude price at 6-month high

Sam Fletcher
Senior Writer

HOUSTON, Mar. 29 -- Crude prices continued to escalate for the sixth consecutive session Mar. 28, as political positions hardened and tensions increased in the standoff over Iran's seizure of 15 UK sailors and marines Mar. 23 in the Persian Gulf.

The UK government said Mar. 28 it was freezing bilateral activity with Iran, after Iran said it would not provide consular access to the UK personnel until it completes its investigation of the incident.

Turkish news sources reported a spokeswoman for Iran's foreign ministry earlier indicated that the lone female UK sailor might be released Mar. 28. When the release did not occur, it prompted "speculation that a rescue attempt is becoming an increasingly possible option," said analysts in the Houston office of Raymond James & Associates Inc.

Other sources reported Iran will not release the UK military personnel unless UK officials acknowledge that they were ½km inside Iranian waters at the time they were captured by naval units of Iran's Revolutionary Guard. The captives have been shown on Iranian television, and there is talk of putting them on trial for violating Iranian territory.

However, UK officials released position-tracking data from a satellite that they say proves the sailors and marines were 1.7 nautical miles inside Iraqi waters when the incident occurred. Moreover, the coordinates originally given by Iran after the capture also put the group at anchor in Iraqi waters (OGJ online, Mar. 28, 2007). The UK is permitted by United Nations mandates to operate in Iraqi territory.

US and UK relationships with Iran aren't likely to improve even if the UK personnel are released. The UN Security Council voted unanimously last week to tighten sanctions on Iran, embargoing all sales by Iran of conventional weapons and freezing foreign assets of 28 Iranian individuals, institutions, and companies, including Bank Sepah. The UN called for nations and international financial institutions to restrict new grants, credits, and loans to Iran unless that country agrees to curb its nuclear program.

"It has not yet been widely publicized, but we understand that the US aircraft carrier USS Nimitz and its strike group (including one guided-missile cruiser and four guided-missile destroyers) will depart San Diego Apr. 1 and head to the Persian Gulf," said Olivier Jakob, managing director of Petromatrix GMBH, Zug, Switzerland. "Having three US aircraft carrier strike groups in the gulf will be a major escalation and a needed one if air strikes against Iran are seriously considered, as most neighboring Arab states would not allow such a strike to be launched from their soil."

Since the US cannot maintain three carriers in those waters "forever," Jakob said, "The strike risk will be at its peak in the next 60 days."

Meanwhile, the Energy Information Administration reported US gasoline stocks fell for the seventh consecutive week, down 300,000 bbl to 210.2 million bbl in the week ended Mar. 23 (OGJ Online, Mar. 28, 2007). That signals "strong US demand for gasoline that remains significantly above the 5-year average," said Raymond James analysts.

Energy prices
The May contract for benchmark US sweet, light crudes jumped by $1.15 to $64.08/bbl—the highest closing price for a leading contract in 6 months on the New York Mercantile Exchange. That contract traded as high as $64.96/bbl in that session. The June contract escalated by $1.03 to $65.68/bbl. On the US spot market, West Texas Intermediate at Cushing, Okla., was up $1.15 to $64.09/bbl. Heating oil bumped up 4.1¢ to $1.83/gal on NYMEX. Despite the continued drawdown of gasoline inventories, the April contract for reformulated blend stock for oxygenate blending (RBOB) dropped 1.58¢ to $2.06/gal.

The expiring April natural gas contract gained 5.5¢ to $7.56/MMbtu on NYMEX. On the US spot market, natural gas at Henry Hub, La., shot up 35¢ to $7.50/MMbtu. On Mar. 29, EIA reported the withdrawal of 22 bcf of gas from US underground storage in the week ended Mar. 23. That was above the consensus of Wall Street analysts and compared with an injection of 17 bcf the prior week and withdrawal of 104 bcf during the same period in 2006. US gas storage now stands at 1.51 tcf, down by 209 bcf from last year but 267 bcf above the 5-year average. "Cooler-than-normal weather is beginning to reemerge in the Northeastern US," Raymond James reported.

In London, the May IPE contract for North Sea Brent crude escalated by $1.18 to $65.78/bbl. The April contract for gas oil jumped by $21.50 to $576.25/tonne.

The average price for the Organization of Petroleum Exporting Countries' basket of 11 benchmark crudes climbed by $1.36 to $61.73/bbl. OPEC's Vienna office will be closed Mar. 30 for a holiday.

Contact Sam Fletcher at [email protected].