Politics became the sole driver of crude prices last week as Israeli-Palestinian relations reached flashpoint. What scared markets most, and what drove prices up by almost $3/B on 12 October, is the fear that with the Middle East peace process in tatters, Arab oil producers may resort once more to suspending or reducing oil exports in order to put pressure on Western powers.
MEES soundings indicate, however, that this subject has not been raised in current regional consultations and is not on the agenda of the Arab summit next week (for political analysis, see section C).
Last week, oil prices were pushed even further out of the control of OPEC.
After tempers flared during the weekend of 7-8 October, on the IPE November delivery Brent crude rose by 66 cents/B on 9 October to settle at $30.76/B, while on NYMEX November delivery WTI crude jumped $1.00/B to close at $31.86/B.
As fears of Middle Eastern conflict subsided only slowly, November Brent rose on 10 October a further $1.09/B to settle at $31.85/B and November WTI ended the day up $1.29/B at $33.15/B.
Yet on 11 October the crude price surge died away as Middle Eastern leaders showed signs of moving towards dialogue rather than confrontation. On 11 October, November delivery Brent ended where it started at $31.85/B, while November WTI did likewise to close at $33.15/B. This leveling off occurred in the face of bullish stock figures, which in other weeks might have led prices higher still.
On 11 October the American Petroleum Institute (API) published its weekly US stocks update, revealing that the previous week crude oil stocks fell by 3.9mn barrels to 283.8mn barrels, which was 16.5mn barrels below the figure for this time last year.
More importantly in the current market, distillate stocks fell by 3.3mn barrels to 113.3mn barrels, which included a fall in heating oil stocks of 964,000 barrels to 46.77mn barrels.
Additionally, refinery utilization rates fell by 0.5 percent to 93.9 percent as refiners had to close some plants for unavoidable autumn maintenance work.
The gloomy API figures followed the publication of the International Energy Agency’s monthly report on 10 October, which raised concerns that North American and European distillate stocks continue to decline from already low levels, while US and European refiners are mainly operating near maximum operating capacity (see page A5).
However, the impact of these pessimistic views may have been dampened by the monthly outlook report on 6 October by the US Department of Energy (DoE), which predicted that US distillates production, imports and stockdraws would be adequate to cover the needs of US heating oil customers, unless the winter is severe (see page A7).
After being becalmed on 11 October, oil markets returned to storm conditions on 12 October as further deaths and retaliatory action in the occupied territories broke the uneasy truce. The prices for November Brent and WTI both surged during 12 October trading: November Brent leapt $2.74/B to close at $34.59/B, having peaked during the day at a 10-year high of $35.30/B after Israeli helicopters attacked targets in Ramallah and Gaza;
similarly November WTI closed $2.91/B stronger at $36.06/B, after hitting a session peak of $37.00/B.
The renewed violence came only shortly after a suspected suicide bombing of a US naval ship in the port of Aden and made Middle Eastern tensions the dominant concern of traders.
And as London’s IPE opened on 13 October, news of an explosion at the British embassy in the Yemeni capital San'a pushed prices 26 cents/B higher immediately. Importantly for oil markets, behind the politics the supply/demand tightness remains unchanged.
Meanwhile, the planned SPR drawdown in the US ran into early problems after the DoE unveiled its list of crude swaps awardees the previous week (MEES, 9 October).
New York-based Euell Energy Resources, one of three small independent traders awarded SPR volumes along with Burhany Energy Enterprises and Lance Stroud Enterprises, failed to gain a letter of credit that would enable the company to fund its 3mn barrel swap deal.
While Euell called for an antitrust investigation, alleging that the deal had been blocked by rival companies, a DoE official told reporters the agreement was “no letter of credit, no oil.”
On 12 October the DoE confirmed that Euell Energy had forfeited its crude allocation, and said that it would probably ask for new bids for the 3mn barrels on 16 October.
Euell Energy was not the only awardee with problems: both Burhany and Lance Stroud Enterprises, which were awarded 3mn and 4mn barrels respectively, were given an additional 24 hours to obtain letters of credit for their crude, with a new deadline set for midnight on 13 October.
If Burhany and Lance Stroud failed to obtain financing, their volumes would also be likely to be rebid on 16 October. When news of Euell’s problems emerged, Sarah Emerson, Director of Energy Security Analysis Inc., Boston, told reporters that “there are so many oil companies queued up to take that oil, that if some fail to get letters of credit, I think that the oil will still be delivered to market.”
© 2000 Mena Report (www.menareport.com)