Market watch, Oct. 26

Crude oil rose more than 2%, its biggest gain in 4 days, amid reports Iraq may suspend its oil exports next week if the United Nations doesn't allow Iraq to make payments for oil in euros instead of dollars, the Bloomberg newswire reported Thursday.


Crude oil rose more than 2%, its biggest gain in 4 days, amid reports Iraq may suspend its oil exports next week if the United Nations doesn't allow Iraq to make payments for oil in euros instead of dollars, the Bloomberg newswire reported Thursday.

Iraq, which pumps almost 4% of the world's oil, has also not told the UN about its pricing plans for next month, suggesting it may halt exports, according to the Middle East Economic Survey (MEES).

North Sea Brent crude oil for December rose 80�, or 2.6%, to $32.16/bbl in trading on London's International Petroleum Exchange, where prices have risen 31% this year. On the IPE, the November natural gas contract closed at the equivalent of $3.66/Mcf, up 9�.

Benchmark light, sweet crude oil for December delivery rose 79�, or 2.4%, to $33.75/bbl on the New York Mercantile Exchange. Prices are up 45% from a year ago.

Iraq has been under UN sanctions since its August 1990 invasion of Kuwait. Since late 1996 it has been allowed to export some oil under UN supervision in return for basic necessities under the oil-for-food program. The money from those oil sales is paid in dollars into an escrow account in New York.

Iraq has asked its clients to pay for the oil in euros. The UN sanctions committee has yet to respond to the demand and, according to MEES, is not scheduled to meet again until Oct. 30. Even if approval is given, it could take months to switch to a euro payment system, said the Cyprus-based newsletter, which is often seen as a reliable source of oil industry news.

Any postponement or interruption of Iraqi oil exports at this juncture could cause a serious shortfall at a time of tight markets and high prices. Iraq exported an average of 2.77 million b/d last week, according to UN figures released Tuesday.

Until reports of Iraq's possible move emerged, traders mostly held back ahead of the expected triggering of the Organization of Petroleum Exporting Countries' price-band mechanism, which could see the group's output rise by as much as 2%.

OPEC, which produces about 40% of the world's oil, has an informal agreement to boost quotas by 500,000 b/d if its price benchmark tops $28/bbl for 20 consecutive trading days. Friday would mark the 20th day. OPEC's benchmark stood at $31.47/bbl on Tuesday.

OPEC has twice this year failed to boost production after the price mechanism was triggered. Analysts said an illiquid market exaggerated price changes. Brent crude has opened and closed between $30 and $32/bbl for the last eight trading days, with frequent fluctuations in the price.

The group boosted production quotas three times this year. Further supplies may come as early as Monday, when the OPEC headquarters in Vienna calculates Friday's closing price for the organization's price benchmark.

Still, not all analysts are convinced an OPEC output increase will have much effect on prices. "The possible OPEC quota hike seems to have been pushed to the sidelines,'' said GNI Ltd. in a daily market report. "Our feeling is that OPEC will agree to the increase, but that the net impact on global supplies will be negligible."

Traders are also watching US temperatures, amid speculation warmer-than-normal weather may allow US heating oil inventories recover from levels 36% below a year ago.

Temperatures in the eastern half of the US, the world's largest energy consumer, are above average for this time of year, according to Weather Services Corp.

US crude oil inventories rose a less-than-expected 1.7 million bbl last week and heating oil supplies stayed more than a third below year-ago levels, the American Petroleum Institute said.

Distillate fuel inventories fell 552,000 bbl to 112.1 million bbl, with declining diesel supplies masking a rise in heating oil. Lower-than-normal supplies of heating oil have raised concern about wintertime shortages in the US.

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