MARKET WATCHMiddle East tensions hike crude price to high for year

Crude prices jumped Mar. 26 to the highest levels this year as Iran continued holding 15 British sailors and marines for the fourth day, sparking market worries over possible escalation of military confrontations in the Middle East.

Sam Fletcher
Senior Writer

HOUSTON, Mar. 27 -- Crude prices jumped Mar. 26 to the highest levels this year as Iran continued holding 15 British sailors and marines for the fourth day, sparking market worries over possible escalation of military confrontations in the Middle East.

"Also increasing the tension, the US Navy is building forces in the greatest display of strength since the 2003 invasion of Iraq. Specifically, this includes approximately 100 warplanes flying simulated exercise attacks off Iranian waters," said analysts in the Houston offices of Raymond James & Associates Inc.

Adding to market concerns, a Mar. 22 fire disrupted production at BP PLC's 410,000 b/d Whiting refinery in northwest Indiana. That facility is the fourth-largest of all US refineries and the second-largest among BP refineries worldwide. That fire sparked "a fear of a rerun of last month's wide contango and weak crude expiry" that led to "a rush of early prompt positions rolls, causing another collapse (sharp widening)" of the contango among monthly contracts for benchmark US crudes, said Olivier Jakob, managing director of Petromatrix GMBH, Zug, Switzerland.

The market also was influenced by expectations that the Energy Information Administration will report Mar. 28 a sizeable drop in US gasoline inventories. "Although driving season technically does not commence until late May, motor fuel demand for the 4 weeks ended Mar. 16 is 2.1% higher than last year," said Raymond James analysts.

Iranian turmoil
Naval units of Iran's Revolutionary Guard on Mar. 23 seized 7 Royal Marines and 8 UK sailors as they finished searching for possible smuggled goods aboard a merchant ship in Iraqi waters just outside the Shatt al-Arab waterway dividing Iraq and Iran. Iran claims the UK personnel were seized within Iranian waters. There was early 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 (OGJ Online, Mar. 26, 2007).

Meanwhile, the United Nations Security Council voted unanimously over the weekend 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.

Under increased international pressure, Iranian officials said they are questioning the British sailors and marines to determine if their alleged entry into Iranian waters was intentional or accidental. That has been interpreted by some as the first sign Iran may be seeking a way out of the standoff. British Prime Minister Tony Blair said he will try diplomacy to win release of UK troops but is prepared to move to a "different phase" if that fails.

Crude prices retreated in early trading Mar. 27 on energy markets as a result of those remarks, said Raymond James analysts.

Energy prices
The May contract for benchmark US sweet, light crudes climbed for the fourth consecutive session, up 63¢ to $62.91/bbl Mar. 26 on the New York Mercantile Exchange. That was the highest closing price for a front-month crude contract on NYMEX since Dec. 20. During the latest session, the May contract peaked at $63.30/bbl, also the highest intraday price since Dec. 20. The June contract gained $1 to $64.52/bbl. On the US spot market, West Texas Intermediate escalated by $1.43 to $62.92/bbl. The April contract for reformulated blend stock for oxygenate blending (RBOB) gained 6.94¢ to $2.07/gal on NYMEX. Heating oil for the same month increased 6.5¢ to $1.78/gal.

The April natural gas contract lost 1.5¢ to $7.25/MMbtu on NYMEX. On the US spot market, however, natural gas at Henry Hub, La., gained 4¢ to $7.13/MMbtu.

In London, the May IPE contract for North Sea Brent crude jumped by $1.23 to $64.41/bbl. The April gas oil contract gained $10.50 to $554.25/tonne.

Jakob claims the front-month benchmark US crude contract on the New York market "is losing its credibility as an adequate investment vehicle to hedge the worldwide crude markets and creating a situation where Brent continues to be priced at a premium" to US sweet, light crudes. He said, "Over the last month, May Brent has gone from a discount of 30¢/bbl to a premium of $1.50/bbl" vs. the price for the May contract of benchmark US crude. "For the directional trader on the long side there is no economic rationale for being in [US crude on NYMEX] than in Brent, and we expect interest to continue to move...into Brent," Jakob said.

Contact Sam Fletcher at samf@ogjonline.com.

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