MARKET WATCH: Attacks on Nigerian oil increases price

Crude again rallied above $70/bbl June 29 to the highest level since June 12 on reports of more attacks on Nigeria’s oil operation, this time at the Estuary oil field operated by Royal Dutch Shell PLC near the Forcados export terminal.

Sam Fletcher
OGJ Senior Writer

HOUSTON, June 30 -- Crude again rallied above $70/bbl June 29 to the highest level since June 12 on reports of more attacks on Nigeria’s oil operation, this time at the Estuary oil field operated by Royal Dutch Shell PLC near the Forcados export terminal.

“On June 25, the Nigerian militants rejected amnesty offered by the Nigerian president; therefore, it appears the crude market is moving higher to discount the possibility of an escalation in militant attacks in the coming weeks,” said analysts at Pritchard Capital Partners LLC, New Orleans.

Olivier Jakob at Petromatrix, Zug, Switzerland, reported, “Crude prices headed south on [June 26] when some market participants believed that the troubles in the Nigerian Delta would be over with the presidential amnesty; and crude prices headed north [June 29] when they realized that it was not the case.”

Pritchard Capital Partners noted, “The rally occurred despite the International Energy Agency (IEA) lowering its 5-year forecast for global crude demand by 3 million b/d. The IEA does not forecast global oil consumption to rise above 2008’s 85.76 million b/d level until 2012, when it forecasts consumption will hit 86.76 million b/d.”

Jakob said, “Our point of view remains that the crude oil markets are now able to distance themselves from trading the pure exogenous correlation to the dollar and equities and to trade on their own fundamentals, which in turn pushes the oil markets to actually lead the exogenous markets. Not everybody agrees that fundamentals are in play in the oil markets, but we believe that after the financial crisis that we went through, too much focus has been put on the demand side of the equation while the supply side has been brushed aside. It is however the supply side in Nigeria that is currently supporting the crude markets, and while it is true that there is enough spare capacity in the Organization of Petroleum Exporting Countries to replace the lost Nigerian barrels, it is also true that spare capacity is not of an immediate use if those countries that have spare capacity limit their exports in an effort to squeeze stocks lower, and it is also true that a refinery does not easily change its slate from Nigerian sweet barrels to Saudi sour barrels.”

In Houston, analysts at Raymond James & Associates Inc. said, “After being delayed due to weather, the closely watched Iraqi oil contract auction has been far from easy sailing. Many of the international oil companies have failed to see eye-to-eye on the fee-based terms offered by the Iraqi Oil Ministry at a number of its fields, hence many of the licenses have yet to be awarded. That said, a BP-led consortium took home the development contract for Iraq's largest oil field, the 17 billion bbl Rumaila field, but this came after an ExxonMobil-led group turned down the project due to less than attractive economics. No offers were extended for the 3.3 tcf Mansuriyah gas field. As we expected, the economics of the contracts are not especially generous; however, we are somewhat surprised by the lack of winning bids given the push of many majors to simply get their foot in the door in anticipation of better terms in the future.”

Oil prices were up in early trading June 30, but natural gas prices were down. June 26 was the last trading day for the July natural gas contract on the New York futures market. “Natural gas sold off over concerns that temperatures will remain below normal reducing air-conditioning use; the National Weather Service’s latest 6-10 day outlook calls for below normal temperatures in the Northeast and Midwest, while above normal temperatures are expected across the west, central and southern states,” said Pritchard Capital analysts.

They noted the Energy Information Administration released April data in its July Natural Gas Monthly reporting dry gas production fell 2.3 bcfd in April sequentially to 57.7 bcfd (vs. 60 bcfd in March; up from 56 bcfd in the same period a year ago); industrial demand fell to 16.2 bcfed vs. 17.87 bcfed in March and 18.3 bcfed in the prior year period; Power generation demand was 15.2 bcfed, down from 16.6 bcfed in March and 15.5 bcfed in the same period a year ago. Texas production declined 850 MMcfed while Wyoming was down 330 MMcfed sequentially, Pritchard Capital Partners said.

The latest EIA gas monthly report “provided a sneak peak into the still only moderate roll-over in domestic gas production for the month of April. After revising up the March figure, total US natural gas volumes declined by a mere 200 MMcfd in April (only 100 MMcfd if we back out Alaska)—not exactly pointing to an acceleration. Despite the inconsistency between the datasets on an absolute basis, the sequential production trends over the past few months have been in-line,” said Raymond James analysts.

Meanwhile, Jakob said, “We have been writing that the evidence that US onshore crude oil stocks were not building despite the fact some offshore stocks were being reduced was an indication that the underlying US crude oil imports were lower than suggested by the face-value number.” EIA’s latest monthly revisions for April “shows that the OPEC cuts are starting to bite as US crude oil imports from OPEC were 1.3 million b/d lower than a year ago. Since imports from Canada (down 139,000 b/d) and Mexico (down 99,000 b/d) are also lower, the US has to rely more on imports from the Atlantic Basin, increasing substantially its imports from countries such as Russia (up 284,000 b/d) or the UK (up 242,000 b/d). With the OPEC supply cuts, the US has gotten more dependent on Atlantic Basin supplies; hence it could be even more impacted than expected by the reduction of Nigerian crude production. This could lead to a rapid tightening of the time-curve on crude oil futures if the rest of OPEC does not start to increase production once the floating stocks have been further depleted.”

Energy prices
The August contract for benchmark US sweet, light crudes escalated $2.33 to $71.49/bbl June 29 on the New York Mercantile Exchange. The September contract climbed by $2.36 to $72.28/bbl. On the US spot market, West Texas Intermediate at Cushing, Okla., was up $2.33 to $71.49/bbl. Heating oil for July delivery increased 5.32¢ to $1.78/gal on NYMEX. Reformulated blend stock for oxygenate blending (RBOB) for the same month advanced 6.17¢ to $1.94/gal.

The new front-month August contract for natural gas dropped 16.1¢ to $3.94/MMbtu June 29 on NYMEX. On the US spot market, gas at Henry Hub, La., gained 6¢ to $3.88/MMbtu.

In London, the August IPE contract for North Sea Brent crude was up $2.07 to $70.99/bbl. Gas oil for July gained $12.25 to $569.75/tonne.

The average price for OPEC’s basket of 12 reference crudes increased 14¢ to $69.43/bbl.

Contact Sam Fletcher at samf@ogjonline.com.

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