Crude futures tally $5 price jump

April 2, 2007
In overnight electronic trading Mar. 27, crude futures prices jumped more than $5 to $68.09/bbl in New York and to $69/bbl for North Sea Brent in London, marking the biggest 1-day price change since December 2001.

Sam Fletcher
Senior Writer

In overnight electronic trading Mar. 27, crude futures prices jumped more than $5 to $68.09/bbl in New York and to $69/bbl for North Sea Brent in London, marking the biggest 1-day price change since December 2001.

That intraday price spike was only temporary, of course, with the May contract closing at $62.93/bbl Mar. 27 on the New York Mercantile Exchange. Yet escalation of Middle East tensions helped boost May crude prices through seven consecutive sessions to a 6-month high of $66.03/bbl Mar. 29 from a Mar. 20 closing of $59.25/bbl.

The price spike initially was attributed to false rumors of an Iranian missile attack on a US ship and of a UK attempt to free 15 British sailors and marines seized Mar. 23 by naval units of Iran's Revolutionary Guard. The US Navy had two carrier groups in the Persian Gulf in the greatest display of strength since the 2003 invasion of Iraq.

However, there were subsequent reports that an electronic error or unusually large purchase had stimulated a price escalation prior to the rumors. Nevertheless, benchmark US crude was trading as high as $66.50/bbl Mar. 29 in New York, with North Sea Brent up to $68.33/bbl in London—"this time during normal market conditions," said Olivier Jakob at Petromatrix GMBH, Zug, Switzerland. He insisted Iran will continue to spook world oil markets in coming months.

Because of the price spike, Jakob said, "Risk managers will be forced to rerun their stress test scenario, and they will need to use something more aggressive than a $5/bbl overnight increase." He said, "This should force the shorts [futures traders with a net excess of open sales over open purchases] into some rethink on their margin call provisions. The combination of current military activity and current tensions in the Persian Gulf leaves little risk-reward [benefits] in keeping an overnight short position, and this should for now lead to stronger short covering towards close of business."

Jakob warned, "Even if all the sailors were to be released, one needs to question what would be the rule of engagement now in the region; the two sides are likely to test each other again, and the risk of future military engagement between the two has increased significantly on the back of this incident."

Positions harden
Iran formally asked UK officials to guarantee British forces will not enter Iranian territory in the future. The Iranians claim the British were 0.5 km inside Iranian waters when they boarded a merchant ship to inspect for possible smuggled goods near the Shatt al-Arab waterway dividing Iraq and Iran.

However, UK officials said a position-tracking satellite proves British personnel were 1.7 nautical miles inside Iraqi waters when seized. Even the coordinates first given by Iran following that incident put the British forces inside Iraqi waters. The UK is permitted by United Nations mandates to operate in Iraqi territory.

UK Prime Minister Tony Blair said his government won't negotiate for the captives. The UK froze bilateral activity with Iran after Iran refused consular access to the UK personnel. Meanwhile, Iran showed on television videos of two of the sailors, including the lone woman in the group, apologizing for violating Iranian territory. There was talk among some Iranian officials of putting the group on trial.

The UN Security Council expressed "grave concern" and supported calls for the British crew's release. Earlier, the Security Council voted unanimously to tighten sanctions on Iran for its refusal to stop uranium enrichment for its nuclear program. The latest resolution embargoed all sales by Iran of conventional weapons and froze the foreign assets of 28 Iranian individuals, institutions, and companies, including Bank Sepah. It called for nations and international financial institutions to restrict new grants, credits, and loans to Iran. It was a follow-up to a Dec. 23 resolution banning trade with Iran in sensitive nuclear materials and ballistic missiles.

"It has not yet been widely publicized, but we understand that the US aircraft carrier USS Nimitz and its strike group (including one guided-missile cruiser and four guided-missile destroyers) will depart San Diego Apr. 1 and head to the Persian Gulf," Jakob reported. That would put three US aircraft carrier strike groups in the gulf—"a major escalation and a needed one if air strikes against Iran are seriously considered, as most neighboring Arab states would not allow such a strike to be launched from their soil," said Jakob. Since the US cannot maintain three carriers in those waters "forever," he said, "The strike risk will be at its peak in the next 60 days."

(Online Apr. 2, 2007; author's e-mail: [email protected])