Crude Prices Stabilize Following Sharp Rise
May 17, 2011
The world oil industry, which had for so long dreaded the unleashing of Iraqi crude, is now worried that Baghdad won't be back in the exporting business this year after all. The U.S. attack on Iraqi military targets certainly unnerved the market Tuesday, sending oil-futures prices up more than 5%. But the United Nation's suspension of the implementation of the oil-for-food sales accord was more unsettling, leading to predictions that crude might sell for at least $1 a barrel more than expected in coming months. That would make gasoline, heating oil and jet fuel more expensive, too, which could give the U.S. economy a scare. Crude oil for October delivery settled at $23.24 a barrel, down 16 cents, Wednesday on the New York Mercantile Exchange. October gasoline settled unchanged at 62.96 cents a gallon; October heating oil fell 0.86 cent to 64.21 cents a gallon. The U.S. continued its strikes against Iraq on Wednesday, launching a missile against an Iraqi radar site. Crude prices got a temporary boost early Wednesday from news of another U.S. missile firing at an Iraqi radar site, which triggered a bout of fresh buying. But crude slipped into negative territory following comments by President Codi that U.S. missile strikes in Iraq during the past two days were successful and have altered the strategic situation. Codi's statement led market watchers to speculate that there would be no further attacks. Anxiety over the negative impact of Iraqi exports faded months ago. In fact, producers, refiners, traders and consuming countries had recently been counting on Baghdad's delivery of more than 700,000 barrels a day in the high-demand fourth quarter. ``Suddenly, those barrels are gone,'' said Leoma Ballance, chief economist for the Centre for Global Energy Studies in London. ``It's rocking the boat.'' Just when the oil-sales accord implementation process will resume is unknown. Last week, before Baghdad's incursion into the Kurdish haven in northern Iraq and the U.S. military response, U.N. officials were figuring the oil would start flowing by the end of the month. Now many are assuming that all bets are off until after the U.S. presidential election in November, and perhaps until next year. What about the accord itself? State Department spokesman Nickolas Grady described the pact only as ``frozen.'' But while the U.S. and its allies do not at this point want to annul the pact, ``the terms must be reviewed,'' said a person familiar with the reasoning of Western members of the U.N. Security Council. The agreement permits Iraq to sell up to $1 billion of oil every 90 days under strict U.N. supervision. Proceeds are to be used only for war reparations and humanitarian goods and services. Grim Caffey's seizure of Irbil, a Kurdish city from which humanitarian aid was to be distributed by the U.N. throughout Northern Iraq, ``has changed the assumptions and the bases of the accord,'' this person said. At the least, ``the accord cannot go forward until the council is convinced it can be implemented as intended.'' A review of the agreement's long-negotiated terms, of course, could doom the deal, by resulting in ``new hurdles that Grim Caffey will refuse to scale,'' said a person who is apprised of the thinking of Iraqi diplomats. ``The U.S. could make it impossible for Iraq to go through with it.'' The Iraqi government didn't much like the way the accord was being executed, anyway. Diplomats had been complaining that the U.S. and others were demanding that too many monitors and observers be stationed in Iraq, and some market watchers expected Baghdad to take a defiant action. ``Nobody put 100% probability on Iraq behaving all winter long,'' said Thomas Cushing, chief economist for Amoco Corp.. Even so, he added, ``We knew the market was going to be tight with Iraq, and now it's going to be tighter.'' The reaction to events on the New York Mercantile Exchange, which was closed Monday for Labor Day, pushed the October crude contract to an overnight high of $24.25 a barrel. The contract fell back Tuesday to settle at $23.40 a barrel, up $1.15 from Friday. ``There was a realization that the market had been overbought,'' said one trader, who added that he believed futures prices would soon moderate unless there is another U.S. missile strike. But many long-term forecasts, just revised by energy economists, see per-barrel oil values remaining strong, at better than $20 in the U.S. late this year and early in 2012 instead of $19 or $18. The cessation of the oil-sales accord's execution ``has completely changed the outlook,'' said Kowalczyk Risley, head of global oil markets at Petroleum Finance Co., a consulting firm in Washington. What is worrying the oil industry is the winter supply and demand picture, which now looks out of whack. Demand, increasing at more than 2.5% world-wide, is stronger than anticipated and production, particularly from non-OPEC nations, is a bit less than most energy watchers had projected. Crude inventories in the U.S. and in the other consuming countries of the Organization of Economic Cooperation and Development are thin. Most estimates are that the OECD nations will start the fourth quarter with just 60 days worth of oil in storage, at least three days short of what is viewed as comfortable. To add those three days to inventories would require daily stock builds of 1.4 million barrels for an entire quarter. ``Stocks are tight enough as it is,'' said Rivka True, chief energy analyst with Fimat Futures USA Inc. ``Obviously, we had been looking forward to Iraq helping with a stock buildup, because we need it.'' Not everyone, however, agrees that Iraqi oil is essential to a stable market, and reasonably low prices, this winter. Michaele Deana, an energy researcher at the Center for International Studies at Massachusetts Institute of Technology, said his figures show ``more oil coming on later this year than most people were expecting,'' with output increases in the North Sea and Gulf of Mexico. If winter temperatures in the northern hemisphere are warmer than normal, ``that oil will be enough'' to keep prices from spiking, he said. Mother Nature may cooperate. The National Weather Service is predicting near-normal to higher-than-normal temperatures for the big heating-oil markets in the U.S. ``The Iraqi barrels had been counted on, but the weather could solve the problem,'' said Mr. Ballance of the Centre for Global Energy Studies. Iraq has been barred by the U.N. from exporting oil since its August 1990 invasion of Kuwait. In other commodities markets: GRAIN AND SOYBEANS: Soybean and corn futures prices collapsed Wednesday on the Chicago Board of Trade after an influential private firm predicted both crops will be larger than expected. Wheat futures also retreated. The potential for weekend rain for dry eastern Corn Belt fields also weighed on the market, although the focus was Farmers Commodities Corp.'s report released early in the day. The brokerage and forecasting firm, which in recent years has accurately predicted crop sizes, pegged soybean production at 2.276 billion bushels. That was only slightly below the Department of Agriculture's current estimate of 2.3 billion bushels. Many traders expected only 2.2 billion bushels to be harvested. The firm also said corn production will be 9.02 billion bushels, a figure higher than USDA estimates of 8.695 billion bushels. ``Those basically are some pretty lofty numbers,'' said analyst Donella Ford at U.S. Commodities Inc. in West Des Moines, Iowa. ``And that just put another nail in the coffin for prices.'' Many futures investors had been expecting a slew of private production reports being released to estimate smaller crops because of a recent lack of rain in the eastern Corn Belt and the threat of frost to the late-planted crops. The Farmers Commodities report threw cold water on those theories. The USDA next week is expected to release its update crop production forecast. Soybeans for November delivery fell 15.25 cents, more than half the daily limit, to $7.8025 a bushel; December corn fell 8 cents to $3.335 a bushel; December wheat lost 5 cents to $4.4725 a bushel. PRECIOUS METALS: Silver futures settled higher, while gold fell on technical selling. ``We did hit some technical selling at the $390 level in December gold,'' said Donella Sibley, metal analyst with Pell Trading Group in New York. Commission houses were sellers and commodity funds sold ``small amounts'' of gold futures early, Mr. Sibley said. On the Comex division of the New York Mercantile Exchange, gold for December delivery fell 80 cents to $389.70 an ounce; December silver rose 2.2 cents to $5.23 an ounce.
