MARKET WATCH: Oil prices continue to climb

The front-month crude contract rose to a record closing of nearly $96/bbl Nov. 2 on the New York Mercantile Exchange amid indications of a stronger US economy and possible new United Nations sanctions against Iran over its nuclear power program.

Sam Fletcher
Senior Writer

HOUSTON, Nov. 5 -- The front-month crude contract rose to a record closing of nearly $96/bbl Nov. 2 on the New York Mercantile Exchange amid indications of a stronger US economy and possible new United Nations sanctions against Iran over its nuclear power program.

"It was a rollercoaster week for oil prices, which got a boost at midweek when the weekly US crude-plus-product inventory report revealed a much larger-than-expected drop in crude inventories for the second straight week," said Robert S. Morris, Banc of America Securities LLC, New York. "The sharp drop in crude stocks was once again underscored by below-normal imports after Mexico suspended exports due to stormy weather in the Gulf of Mexico and as refiners continue to draw feedstock from lower-cost inventories with crack spreads at seasonal lows and the NYMEX crude oil futures contract in backwardation."

Morris said, "Oil prices got a further boost at the end of last week when the US government reported that twice as many new nonfarm jobs as expected were added in October, which alleviated fears of an economic downturn, at least for the moment."

On Oct. 31, the Federal Open Market Committee cut the federal funds rate—the rate commercial banks charge on overnight loans among themselves—by 0.25% to 4.5%, which led the US dollar to a new record low against the euro (OGJ Online, Oct. 31, 2007). "The single variable that exhibits the strongest correlation to the rise in oil prices over the past year is the concurrent drop in the US dollar," Morris said.

Refinery problems contributed to the Nov. 2 rise in crude prices. Petroplus Holdings AG's 172,000 b/d refinery in England expects production to be limited for a month due to a fire. Chevron Corp. said its 330,000 b/d refinery in Pascagoula, Miss., will operate at reduced rates until early next year because of a fire in August.

US statistics to be reported this week "should be bullish again, due to lower Mexican crude exports," said the Societe Generale Group (SGG) in Paris. "The weaker dollar should continue to support crude prices this week." Petroleos Mexicanos reported late last week that it had restored all but about 300,000 bbl of oil production halted the previous weekend when storms hit the Gulf of Mexico (OGJ Online, Nov. 1, 2007).

Meanwhile, the British Foreign Office said the UN Security Council agreed to draft a new sanctions resolution that could be passed in November unless Iran cooperates with the International Atomic Energy Agency.

Yet crude prices fell below $95/bbl in early electronic trading Nov. 5 before NYMEX opened its regular session. "The combination of profit taking and easing tensions between Turkey and Iraq has pushed prices down," said analysts in the Houston office of Raymond James & Associates Inc. "Over the weekend, Kurdish fighters released eight Turkish soldiers in a step toward resolving the situation. Although tensions between Turkey and Iraq have slightly eased, tensions in Pakistan could add to the geopolitical risk premium of prices." Pakistan President Pervez Musharraf declared a state of emergency Nov. 4 and postponed elections after Pakistani security forces broke into a building where human rights activists gathered and arrested at least 70 activists and journalists. On Nov. 5, Pakistani police wielding tear gas and batons, arrested 1,500 lawyers outside of a Lahore courthouse.

Energy prices
The December contract for benchmark US light, sweet crudes jumped $2.44 to a record closing of $95.93/bbl Nov. 2 on NYMEX. The January contract escalated by $2.36 to $94.81/bbl. On the US spot market, West Texas Intermediate at Cushing, Okla., was up $2.45 to $95.94/bbl. The December contract for reformulated blend stock for oxygenate lending advanced by 9.63¢ to $2.44/gal. Heating oil for the same month increased 6.14¢ to $2.57/gal.

The December natural gas contract dropped 21.9¢ to $8.42/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., fell 35.5¢ to $6.79/MMbtu.

In London, the December IPE contract for North Sea Brent crude increased $2.36 to $92.08/bbl. The November gas oil contract gained $14.25 to $802.25/tonne.

The average price for the Organization of Petroleum Exporting Countries' basket of 12 reference crudes inched up 4¢ to $87.57/bbl on Nov. 2. So far this year, OPEC's basket price has averaged $65.60/bbl, up from $61.08/bbl for all of 2006.

Contact Sam Fletcher at samf@ogjonline.com

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