MARKET WATCH Troubles in Iraq, Russia push up London crude futures prices

Sam Fletcher
Senior Writer

HOUSTON, July 5 -- Crude futures prices rose Monday in London with reports of more damage to Iraqi oil pipelines and the possible shutdown of some oil operations by the giant Russian firm, OAO Yukos.

The New York Mercantile Exchange was closed Monday for the US Independence Day holiday, but energy futures prices fell in profit taking Friday ahead of the long holiday weekend. Trading was lower than normal during NYMEX's shortened session Friday, with many participants taking the day off.

NYMEX prices
The August contract for benchmark US light, sweet crudes dropped 35¢ to $38.39/bbl Friday on NYMEX as traders locked in profits from price run-ups in the previous two sessions. The September contract lost 37¢ to $38.46/bbl. On the US spot market, West Texas Intermediate at Cushing, Okla., was down by 35¢ to $38.38/bbl Friday.

Heating oil for August delivery slipped by 0.76¢ to $1.0727/gal on NYMEX. However, gasoline for the same month climbed by 1.88¢ to $1.2444/gal. The August natural gas contract lost 6.9¢ to $6.15/Mcf Friday on NYMEX.

Natural gas prices have not mirrored the recent rise in oil prices "due to a la ck of weather-related demand," said Robert S. Morris in a report Tuesday for Banc of America Securities LLC, New York. "The inelasticity of demand to high natural gas prices remains solid," he said.

However, analysts at Enerfax Daily noted Tuesday that a significant warming trend is expected soon. "Forecasters are predicting periodic heat waves through August in the western, southern, and eastern regions of the nation," they said.

London market reacts
In London, the August contract for North Sea Brent crude lost 15¢ to $35.92/bbl Friday on the International Petroleum Exchange. But it rebounded Monday, up by 38¢ to $36.30/bbl, on reports of additional damage to oil pipelines in Iraq. Gas oil for July delivery was up by $4.50 to $343.25/tonne Monday. However, the August natural gas contract dipped by 3.5¢ to the equivalent of $4.03/Mcf on IPE.

Morris reported Tuesday, "A ruptured pipeline in Iraq on Saturday has reduced exports roughly by one half. There was no word as of Monday evening as to what caused the damage or how long it will take to repair the pipeline. Nonetheless, while US markets were closed on Monday, oil prices rose sharply in London to a 1 month high in reaction to the news."

However, the Organization of Petroleum Exporting Countries' news agency said Monday, "An oil pipeline carrying crude to the Iraqi terminals in the Faw peninsula was set on fire by an explosive device and another explosion damaged a pipeline south of Baghdad."

The London market also was affected Monday by reports that the giant Yukos oil company may be forced into bankruptcy. "Yukos, which produces roughly 2% of the world's crude oil, might be forced to halt output this week because bailiffs had frozen its bank accounts in a tax dispute. In fact, Yukos stated on Monday that it will slash some of its 400,000 b/d of oil and products exported by rail and river this month, but that it would maintain its commitments on all other exports," said Morris.

The average price for OPEC's basket of seven benchmark crudes gained 75¢ to $34.75/bbl Friday, then added another 13¢ for a total of $34.88/bbl on Monday.

OPEC outlook
So far this year, OPEC's basket price has averaged $32.59/bbl, sparking speculation that OPEC ministers may discuss adjusting upward the group's target price band of $22-28/bbl at their July 21 meeting in Vienna. Analysts at Merrill Lynch Global Securities Research & Economics Group, New York, report Venezuela is the primary proponent for raising OPEC's target price. They noted that Venezuela's production capacity has declined by 15% since early 2003, "owing to the effects of the general strike in late 2002." However, they said, "Reliable indications strongly suggest that key member countries will continue to oppose any upward adjustment," although "prices are likely to gravitate generally at or above the top end of OPEC's targeted price band for the foreseeable future (which is the equivalent of $30/bbl for WTI crude)."

It is less clear whether OPEC will stick with previous plans to hike its current production quota of 25.5 million b/d by another 500,000 b/d in August. Traders were rattled last week when Saudi Arabia's oil minister, Ali al-Naimi, said OPEC no longer needs to adjust its total production quota now that prices have reached a "fair" level (OGJ Online, July 2, 2004). Iranian Petroleum Minister Bijan Namdar Zangeneh was quoted Monday by the Iranian news agency as saying, "We believe the oil market is in a balanced position for both oil consumers and producers."

"While incremental barrel availability from Saudi Arabia will rise by the end of the third quarter with Qatif and Abu Safah projects coming online, the fourth quarter of the year also sees a seasonal increase in market requirements for OPEC oil," said Merrill Lynch analysts. "Our supply-demand balance forecasts the 'call on OPEC crude' to be 27.7 million b/d [in the fourth quarter], meaning spare capacity will remain thin even with the Kingdom's projects being completed."

Contact Sam Fletcher at [email protected]