MARKET WATCH: Crude prices rise prior to strike settlement

Sam Fletcher
Senior Writer

HOUSTON, June 25 -- The front-month crude contract climbed above $69/bbl June 22 in the New York market on reports that negotiations had failed to end a general strike in Nigeria.

On June 23, however, the blue-collar Nigeria Labor Congress and the white-collar Trade Union Congress called off the 4-day strike after newly elected President Umaru Yar'Adua promised no further increases in the retail price of fuel for a year, canceled an increase in the value-added tax, and pledged to increase civil-service salaries by 15%. Yar'Adua let stand half of the fuel price increase imposed by his predecessor at the end of his term of office. Auto fuel is heavily subsidized in Nigeria, and the government has tried to reduce that subsidy to free up cash.

In other news, Schlumberger Ltd. said four employees kidnapped June 1 in Port Harcourt, Nigeria, were released by militants June 23.

"Although the strike had not interrupted exports, the removal of that threat is weighing on oil today," analysts said June 25 in the Houston office of Raymond James & Associates Inc. Meanwhile, they said, "Iran's interior minister announced that the country now has 220 lb of enriched uranium. The expectation of further Western opposition to Iran's nuclear weapons program, and the possible supply disruption this may entail, is helping keep the geopolitical risk premium embedded in oil prices at relatively high levels."

Olivier Jakob, managing director of Petromatrix GMBH, Zug, Switzerland, said, "The 'Iranium' discussions continue and the next benchmark will be to see how strong a support and unity there is within the United Nations to impose a third layer of sanctions when they have so far yielded no changes." Meanwhile, he said, "With the US reporting close to maximum of inventory on crude oil, no continuation to the Nigerian strike, and no storms yet developing in the Atlantic Basin, the focus will shift even further on the US refinery capacity utilization."

Analysts at Center for Global Energy Studies, London, said June 25 that the world needs more oil if another price surge is to be avoided. They reported crude prices have risen by $10/bbl between the first and second quarters of this year—"the biggest quarterly increase this decade"—and are likely to continue increasing to a total of $11/bbl.

Such a dramatic rise in oil prices should be "a clear signal" to members of the Organization of Petroleum Exporting Countries that more oil is needed in the market. However, the analysts said, "OPEC points to bottlenecks in the refining system, particularly in the US, and geopolitical tensions in the Middle East and Nigeria as the driving forces behind the recent surge in oil prices. US crude oil inventory and refinery utilization figures certainly appear to support OPEC's interpretation. Crude oil stocks in the US were at their highest level for more than 9 years in mid-June, while refinery utilization rates since the beginning of the year averaged 88%, failing to improve on those during the hurricane-affected first half of 2006 despite high margins."

CGES said in its report, "Although technical problems have kept US refinery runs stubbornly low, global throughputs are up [from] last year, following increases in China, India, and Russia. Global oil inventories are not high either and are likely to show only most modest growth in the second quarter, a quarter when stocks would usually be expected to increase by around 1 million b/d, while a continuation of OPEC's current output level into the third quarter would lead to a global stock draw of around 140,000 b/d during the second 'stock-building' quarter of the year."

Rising geopolitical tensions also are an argument for increased production, the analysts said. "In times of rising tension refiners want to hold higher stocks to offset the risks of future supply disruptions. OPEC counters that it can make additional supplies available in the event of a disruption, but the overall time lags in a supply chain that involves taking and implementing a decision to raise output, positioning vessels to load and deliver the additional oil to market, moving that oil to refineries, processing it, and delivering the product to consumers, can amount to as much as 12 weeks, whereas prices react immediately," CGES analysts said.

They noted that, with its own refinery utilization down, the US will become even more reliant on imports of petroleum products in coming months, especially gasoline. "Asian refinery runs will rise over the summer as plants come out of turnaround, while US refiners will also be seeking to boost throughputs and European throughputs will remain high to supply the US market. Global oil supply is little changed from last year, whereas refinery runs are up by nearly 1 million b/d," CGES said.

Energy prices
The August contract for benchmark US light, sweet crudes gained 49¢ to $69.14/bbl June 22 on the New York Mercantile Exchange. The September contract escalated by 60¢ to $69.80/bbl. On the US spot market, West Texas Intermediate at Cushing, Okla., was up 97¢ to $68.90/bbl. Heating oil for July delivery increased by 1.53¢ to $2.04/gal on NYMEX. The July contract for reformulated blend stock for oxygenate blending (RBOB) climbed 3.99¢ to $2.29/gal.

The July natural gas contract fell 21.8¢ to $7.35/MMbtu on NYMEX. On the US spot market, natural gas at Henry Hub, La., dropped 21¢ to $7.03/MMbtu.

In London, the August IPE contract for North Sea Brent crude gained 96¢ to $71.18/bbl. The July gas oil contract lost $2 to $630.75/tonne.

The average price for OPEC's basket of 11 benchmark crudes dropped 23¢ to $67.35/bbl on June 22. So far this year, OPEC's basket price has averaged $59.38/bbl vs. $61.08/bbl for all of 2006.

Contact Sam Fletcher at [email protected].