Global Insight Perspective | |
Significance | Crude prices have again approached nominal record highs as Tropical Storm Chris poses a potential risk to Gulf of Mexico (GOM) oil and gas production. |
Implications | Tropical Storm Chris is the first storm to pose any real threat to the GOM oil and gas industry, but it is unlikely to be the last. Due to the tight global oil market, any further supply disruptions will impact the overall balance and markets are reflecting this threat by pricing the risk in. Through August and September analysis from the U.S. National Hurricane Center may be as influential on crude prices as OPEC. |
Outlook | Although the threat from Tropical Storm Chris appears to be receding, an array of supply threats and background geopolitical tensions means that prices will be supported at over US$70/b with upside risk. |
Crude prices in New York (NYMEX) and London (ICE) rose sharply again yesterday as concerns over Tropical Storm Chris grew, while the Israel-Lebanon conflict further intensified. Markets are concerned that Tropical Storm Chris, currently lying off the east coast of Cuba, could pose a threat to GOM oil and gas production facilities in coming days, with the U.S. National Hurricane Center (NHC) issuing an advisory that the storm could develop into a hurricane and possibly reach the U.S. GOM. With memories of the extensive damage to the industry caused by Hurricane Katrina last year still fresh, crude prices rose strongly on international markets. Front-month NYMEX crude hit a high of US$76.50/b in intraday trading before closing on US$75.81/b, a rise of US$0.90/b on the previous close. In London ICE Brent peaked at US$77.47/b before weakening towards the end of the day to close up US$1.00/b on US$76.89/b. Reports today indicate that Tropical Storm Chris may be weakening, which will bring some relief to crude markets. However, it is still relatively early in the hurricane season and further storms are likely to threaten GOM production before the end of September.
In addition to the threat posed by the weather in the vital U.S. GOM, the intensifying offensive by the Israeli military in Lebanon, with few signs of an immediate ceasefire, also contributed to market jitters (see Mexico: 2 August 2006: Production Fall at Cantarell Field Will Add Concerns About Mexican Supply Outlookand Venezuela: 24 July 2006: U.S. Government Urged to Make Plans for Possible Venezuelan Oil-Supply Disruption) . Diplomacy has thus far been a slow process and as the violence continues to escalate, so the threat of a wider conflict, possibly involving Syria or Iran, remains. How the current situation plays out may also have important ramifications for Iran in its stand-off with the UN over its nuclear programme. Iran now has until 31 August to end uranium enrichment or face unspecified further action by the UN Security Council. Prolonged violence in Lebanon may make it difficult for the United States to build a consensus with China, Russia and France over Iran, leaving open the more dangerous option of the United States once again going it alone. This concern over Iran is having less impact on day-to-day price movements, but is factored into the US$75/b price.
Amidst the various supply worries, with questions over Mexico's Cantarell decline rate and Venezuelan tensions with the United States also getting some play, was the weekly inventory report from the U.S. government's Energy Information Administration (EIA). The EIA reported a 1.8-million-barrel decline in U.S. crude stocks and a smaller-than-expected 0.1-million-barrel decline in gasoline stocks. Distillate and propane inventories were once again the bright spot for U.S. refining, with stocks rising yet again as U.S. refinery utilisation rates surprisingly fell to 90.83% for the week ending 28 July. The rep[ort was, overall, relatively neutral, with gasoline demand rising slightly on the previous week.
Outlook and Implications
With reports that Chris may be weakening, the hurricane-related surge in prices is likely to be reflected in further declines, but geopolitical tensions and a host of other supply threats continue to keep prices close to US$75/b. The situation with Iran is unlikely to be resolved quickly, unless Iran does abide by the UN Security Council demand that it end uranium enrichment. Signs are that Iran will seek to play for time on this issue and it appears unlikely that Iran will comply fully. The tensions caused by Israel's attack on Lebanon are also unlikely to subside quickly and global oil demand is still buoyed by strong growth in Asia, although signs of a slowdown in the United States may ease the overall growth rate slightly. Global inventories are relatively healthy and new production will be coming on stream in the second half of the year. This may not have a significant impact on prices until well into 2007, however, given the array of supply threats. The outlook for prices is for continued fluctuation around the US$75/b mark, with upside risk.