MARKET WATCH: Oil prices surge following Nigerian unrest

Sam Fletcher
Senior Writer

HOUSTON, July 9 -- Oil prices surged July 6 as a month's truce ended in Nigeria with an attack on a well site and the kidnapping of a 3-year-old British girl in Port Harcourt in the Niger Delta.

The child was grabbed July 5 as she was being dropped off at school by her father, who is employed in the petroleum industry. She was released apparently unharmed July 8, but three foreign workers were abducted. More than 200 foreigners, mostly oil workers or members of their families, have been kidnapped in Nigeria since January 2006. Nearly all were subsequently released or freed by government soldiers.

As much as 611,000 b/d of Nigerian crude production were reported shut in as a result of attacks on oil facilities in that country.

Robert S. Morris, Banc of America Securities LLC, said, "Oil prices gained momentum from ongoing unrest in Nigeria, but more importantly, from strong US employment data indicating that economic growth may accelerate and in turn spur higher energy consumption. On the other hand, both [US] crude and gasoline inventories posted a much larger-than-expected build last week with the pace of gasoline demand growth slowing to its lowest mark—0.5% year-over-year 4-week average increase—so far this year."

Analysts in the Houston office of Raymond James & Associates Inc. said, "Over the past year, it appears that at least a third of the Organization of Petroleum Exporting Countries' production declines are involuntary and not the result of policy implementation. Countries such as Nigeria, Venezuela, Indonesia, and Iran were already experiencing deteriorating production profiles as a result of either political instability or natural production declines (or both) well before OPEC implemented its official production cuts."

Raymond James analysts said, "Given that these declining OPEC production profiles seem to more permanent in nature, we believe that potential supply increases from other OPEC producers (notably Saudi Arabia) will not increase overall OPEC supply as much as the market may believe."

In a report released July 9, the International Energy Agency in Paris said it sees increasing market tightness beyond 2010, with OPEC's spare production capacity declining to minimal levels by 2012, despite 4 years of high oil prices. "A stronger demand outlook, together with project slippage and geopolitical problems has led to downward revisions of OPEC spare capacity by 2 million b/d in 2009," said IEA officials. OPEC's spare capacity is expected to remain relatively constrained before 2009 when slowing upstream capacity growth and accelerating demand from nonmembers of the Organization for Economic Cooperation and Development once more will pull it down to uncomfortably low levels, said IEA officials.

"Our OPEC capacity forecast assumes that there will be no net expansion of capacity in Iran, Iraq, and Venezuela and that the 500,000 b/d of Nigerian capacity that has been shuttered for a year will not come back on line during the forecast period. Recent history would suggest that a conservative approach to OPEC capacity is justified—in recent years, effective OPEC capacity has averaged around 1 million b/d below nominal capacity," IEA said.

Analysts at the Société Générale Group said US gasoline demand should be stable this week, with refinery utilization rate remaining the key point in coming weeks.

Eitan Bernstein of Friedman, Billings, Ramsey & Co. Inc., Arlington, Va., said, "US crude oil prices have surged during the past few months [past] $70/bbl, and, while this increases the risk of a downward correction, we believe that a large, sustained price drop is unlikely, based on rising global consumption growth, tight upstream and downstream supplies, and OPEC signaling its intent to defend a $55-65/bbl long-term oil price." Therefore, FBR raised its 2007 average price forecast for West Texas Intermediate to $63/bbl from $60/bbl. The company hiked its 2008-2010 WTI average price forecast to $60/bbl from $55/bbl and its long-term (i.e., 2011-20) forecast to $55/bbl from $50/bbl.

Energy prices
The August contract for benchmark US light, sweet crudes traded as high as $72.94 before closing at $72.81/bbl July 6 on the New York Mercantile Exchange, up $1 for the day. In London, the August IPE contract for North Sea Brent crude pushed as high as $76.01/bbl before finishing at $75.62/bbl, up 87¢ for the day. In both markets it was the highest intraday price for a front-month crude contract since August 2006 when all-time record highs were set. Some analysts think new records may be set this summer.

Meanwhile, the September crude contract advanced by $1 to $73.15/bbl on NYMEX. On the US spot market, West Texas Intermediate was up $1 to $72.82/bbl. Heating oil for August delivery edged up 0.78¢ to $2.10/gal on NYMEX. The August contract for reformulated blend stock for oxygenate blending (RBOB) bumped up 2.53¢ to $2.31/gal.

The August natural gas contract fell 17.4¢ to $6.44/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., lost 9¢ to $6.18/MMbtu. At BAS, Morris said, "Despite a lower-than-expected storage injection [in the week ended June 29], composite spot natural gas prices dropped to nearly $6/MMbtu as markets watchers looked ahead to moderating temperature forecasts, no news along the tropical storm front, and easy comparisons to last year over the next several weeks with regard to weather and storage injections that should underpin a further narrowing in the year-over-year storage deficit, which now stands at 84 bcf."

The July gas oil contract gained $7.25 to $644.25/tonne in London.

The average price for OPEC's basket of 11 benchmark crudes climbed by 92¢ to $71.14/bbl on July 6. So far this year, OPEC's basket price has averaged $60.08/bbl, compared with an average price of $61.08/bbl for all of 2006.

Contact Sam Fletcher at [email protected].