MARKET WATCHMiddle East tension drives up oil prices

Crude futures prices continued climbing moderately Mar. 23 after naval units of Iran's Revolutionary Guard seized 8 UK sailors and 7 Royal Marines who had boarded a merchant ship in Iraqi waters of the Persian Gulf.

Mar 26th, 2007

Sam Fletcher
Senior Writer

HOUSTON, Mar. 26 -- Crude futures prices continued climbing moderately Mar. 23 after naval units of Iran's Revolutionary Guard seized 8 UK sailors and 7 Royal Marines who had boarded a merchant ship in Iraqi waters of the Persian Gulf.

However, analysts in the Houston office of Raymond James & Associates Inc. reported crude prices near a 3-month high in early trading on Mar. 26. "Geopolitical concerns and supply disruption possibilities are on the forefront of traders' minds," they said. With a build up of US military forces in the region, analysts said, "The tension is expected to increase in the foreseeable future. Roughly a quarter of the world's oil supply flows through the Strait of Hormuz, a narrow waterway between Iran and Oman. Therefore, any transportation disruptions through that waterway would have a large impact on the world's crude oil supply."

UK officials demanded the immediate safe return of military personnel who were inspecting for possibly smuggled goods aboard a merchant ship just outside the Shatt al-Arab waterway dividing Iraq and Iran. Jurisdiction over that area has long been contested between the two countries. There is speculation that the seizure might be in retaliation for US detention of five Revolutionary Guard operatives following a January raid on the Iranian consulate in Irbil, Iraq, as part of the effort to counter Iran's growing influence in that neighboring country. The Iranian Revolutionary Guard naval corps operates separately from Iran's navy.

Meanwhile, the United Nations Security Council voted unanimously over the weekend to tighten sanctions on Iran after Iranian President Mahmoud Ahmadinejad cancelled his planned appearance to defend his country's uranium enrichment program. US officials disputed Ahmadinejad's complaint that the crew of his private jet did not receive visas for the New York visit.

The latest resolution embargoed all sales by Iran of conventional weapons and froze the foreign assets of 28 Iranian individuals, institutions, and companies, including Bank Sepah. It calls for nations and international financial institutions to restrict new grants, credits, and loans to Iran. It was a follow-up to a Dec. 23, 2006, resolution banning trade with Iran in sensitive nuclear materials and ballistic missiles.

Energy prices
The May contract for benchmark US light, sweet crudes escalated 59¢ to $62.28/bbl Mar. 23 on the New York Mercantile Exchange. The June contract gained 50¢ to $63.52/bbl. On the US spot market, West Texas Intermediate at Cushing, Okla., was up 84¢ to $61.49/bbl. The April contract for reformulated blend stock for oxygenate blending (RBOB) jumped by 4.08¢ to $2/gal amid speculation of high US demand for gasoline this summer. Heating oil for the same month inched up by 0.69¢ to $1.71/gal.

The April natural gas contract fell by 5.1¢ to $7.27/MMbtu on NYMEX. On the US spot market, however, it gained 2.5¢ to $7.09/MMbtu. "Gas prices are strengthening due to the current rise in oil prices and a cooler-than-normal weather forecast along the East Coast," Raymond James reported Mar. 26. "The cooler weather may lend some support during the tail end of the injection season, and we are still on track to end the withdrawal season slightly below 1.5 tcf."

In London, the May IPE contract for North Sea Brent crude gained 67¢ to $63.18/bbl. The April gas oil contract increased by $6.25 to $543.75/tonne.

The average price for the Organization of Petroleum Exporting Countries' basket of 11 benchmark crudes jumped by $1.14 to $58.92/bbl on Mar. 23. So far this year, OPEC's basket price has averaged $53.96/bbl. In 2006, OPEC's basket price averaged $57.49/bbl at this period, finishing at an average price of $61.08/bbl for the whole year.

Contact Sam Fletcher at samf@ogjonline.com.

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