MARKET WATCHCrude futures price closes above $61/bbl

Crude futures prices continued to explore new highs for this year, closing above $61/bbl in volatile trading Feb. 23 on the New York Mercantile Exchange.

Feb 26th, 2007

Sam Fletcher
Senior Writer

HOUSTON, Feb. 26 -- Crude futures prices continued to explore new highs for this year, closing above $61/bbl in volatile trading Feb. 23 on the New York Mercantile Exchange.

A strong rally Feb. 21-23 pushed above the recent trading range for crude to wipe out the sharp January losses in that market when crude prices fell from a $61.05/bbl closing on the last trading day of 2006 to below $50/bbl in the first weeks of 2007. With demand again driving the market amid several potential threats to supply, analysts with the Société Générale Group said, "At best the market would pause before moving straight to $64-65/bbl."

Market factors
"Oil prices rose on refinery glitches along the US Gulf Coast and a major product pipeline outage in the Midwest, moderately bullish US crude-plus-product inventory data, and heightened tensions between Iran and the West," said Robert S. Morris, Banc of America Securities LLC, New York. "Due largely to lower-than-expected refinery utilization, US crude inventories rose much more than expected although distillate and gasoline stocks dropped more sharply than anticipated."

Meanwhile, Morris said, "The 60-day grace period following the UN Security Council's Dec. 23 decision to impose sanctions on Iran for not halting its uranium enrichment activities passed with Tehran remaining defiant and actually expanding its enrichment capacity. In fact, Iran's president stated that his country would move forward with its nuclear program and likened it to a train without brakes. Consequently, the US and key allies are expected to meet this week to seek a new UN resolution in response to Iran's continued defiance."

The likely outcome of that meeting will be "real economic sanctions (tougher than what the UN has done thus far), and if that doesn't work, potentially military action, presumably led by the US," said analysts in the Houston office of Raymond James & Associates Inc.

"Last fall's sharp plunge in the oil market reflected a narrowing of the geopolitical risk premium, suggesting that a much higher probability was being placed on the peaceful scenario," Raymond James analysts said. "On the other hand, oil's rebound from $50 to $61/bbl in recent weeks took place concurrently with sharper Washington vs. Tehran rhetoric and signs that Iranian President Mahmoud Ahmadinejad has no intention of moderating his policies. While there have certainly been other drivers boosting oil prices (for example, the announced increase in the US Strategic Petroleum Reserve and notably bullish inventory data), Iran is now very much on the minds of oil traders."

Elsewhere, they said, "The situation in Iraq does not seem to be improving, and may be worsening (allegedly with Iran's involvement). Russia is playing hardball with international oil companies. Venezuela has expropriated foreign-owned oil properties and continues to antagonize Washington. Additionally, Nigerian oil production has suffered chronic disruptions because of civil unrest. All in all, to state the obvious, world peace isn't breaking out, certainly not in oil-producing countries."

As a result, Raymond James analysts said, "A geopolitical risk premium of some magnitude looks set to remain in oil prices on a permanent basis. As the market comes to recognize this reality, we look for oil prices to continue rebounding to the $70/bbl level towards the end of 2007."

For the first time this year, the large speculative funds are showing a net long position [contracts obligating the holder to take delivery] in crude oil, reported Olivier Jakob, managing director of Petromatrix GMBH, Zug, Switzerland. That change "needs to be taken as a positive input as it is starting to be the confirmation of a move that started 3 weeks ago," he said.

Jakob said, "Despite crude oil being more than $10/bbl higher than the January lows, margins for ethanol processors remain mostly unchanged and at break-even only when the sale subsidy is considered. Biofuels were an attractive alternative last year when crude oil started to trade above $70/bbl but the price of corn is now close to 100% higher than last year and price increases in corn are now keeping pace with increases in oil."

Energy prices
The April contract for crude climbed as high as $61.80/bbl before dropping to $60.50/bbl near the close of intraday trading after Teppco Partners LP said it is restarting shipments of refined products on a pipeline earlier shut down earlier because of a leak, disrupting shipment of 60,000 b/d of refined products from the Gulf Coast to Northeastern markets (OGJ Online, Feb. 22, 2007). Profit taking from the rally also contributed to that rollback, analysts said. Nonetheless, the contract closed at $61.14/bbl, up 19¢ for the day on NYMEX.

The May contract climbed by 30¢ to $62.35/bbl. On the US spot market, West Texas Intermediate at Cushing, Okla., was up 97¢ to $60.53/bbl. Heating oil for March delivery rose by 2.55¢ to $1.75/gal on NYMEX. The March contract for reformulated blend stock for oxygenate blending (RBOB) increased by 0.83¢ to $1.76/gal.

The March natural gas contract gained 2.8¢ to $7.76/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., advanced by 6.5¢ to $7.56/MMbtu. "On the natural gas front, prices are trading up, as cooler-than-average temperatures are expected across the Midwest," said Raymond James analysts.

In London, the April IPE contract for North Sea Brent crude was up 26¢ to $60.88/bbl. The March gas oil contract gained $13.75 to $539.50/tonne.

The average price for the Organization of Petroleum Exporting Countries' basket of 11 benchmark crudes jumped by $1.42 to $56.41/bbl on Feb. 23. So far this year, the OPEC basket price has averaged $52.71/bbl compared with an average $61.08/bbl for all of 2006.

Contact Sam Fletcher at samf@ogjonline.com.

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