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Oil prices feel ripples of Ivan, Russia

Published Aug. 28, 2005

Oil prices advanced to their highest level in a month Monday, surpassing $46 a barrel, as supply constraints in the United States and Russia piqued the nerves of a market already edgy about the world's limited production capabilities and rising demand.

Cash-strapped Russian oil giant Yukos said it would halt some oil exports to China, while U.S. petroleum inventories are expected to decline again this week due to production, refining and shipping delays caused by Hurricane Ivan.

Neither factor is itself a punishing blow to the global supply chain, analysts said, though each is enough to test the nerves of traders already worried that there might not be enough excess output capacity to handle a more serious, prolonged disruption.

Light crude for October delivery was up 76 cents to $46.35 per barrel on the New York Mercantile Exchange. In London, Brent crude for November delivery gained 46 cents to $42.91 per barrel on the International Petroleum Exchange.

While workers who had been evacuated from oil production platforms and refineries in and around the Gulf of Mexico last week are returning to work, analysts are uncertain about just how long it will take for output and shipments to resume to normal levels.

About 7.8-million barrels of oil production in the Gulf of Mexico have been shut-in, or cut off, since last Monday, according to the federal Minerals Management Service. That is equivalent to about 1.3 percent of total annual production in the region.

As of Monday, daily oil production in the Gulf was still 41 percent below normal, while natural gas production was down by 24 percent. The region accounts for roughly one-quarter of all the oil and natural gas used in the United States.

Analysts expect government oil inventory data, to be released Wednesday, to show sharp declines for the second week in a row. Last week, the nation's available supply of oil fell by more than 7-million barrels, bringing inventories to 278.6-million barrels, or about 1 percent below year ago levels.

Still, past experience suggests that hurricane-related supply interruptions are often short-lived. In its weekly oil market commentary, the Energy Department said last week that it expects to see weekly supply data rebound once tankers that were delayed make their deliveries.

Oil markets were also buoyed Monday by Yukos' announcement that it would suspend roughly 100,000 barrels per day of oil exports to the Chinese National Petroleum Corp. because it cannot afford to pay the rail transport expenses.

While the export reduction was tiny and could easily be replaced by another Russian company, analysts said the development was having a psychological impact on global oil markets, which have been strained by strong demand amid tight supplies.

Sporadic disruptions to Iraqi oil production and exports _ the result of sabotage by insurgents _ have also unnerved markets in recent months.

"In the current environment, any little thing that slows supply is going to have an effect," said Mike Fitzpatrick, a trader at Fimat USA in New York.

Yukos is struggling to pay a potentially crippling bill for 2000 back taxes totaling $3.4-billion. It faces a similar claim for 2001, and the total claims against it for the period 2000 to 2003 are expected to swell to about $10-billion.

The company, whose accounts are frozen, has repeatedly warned that production and exports could be hampered.

The Organization of Petroleum Exporting Countries last week boosted its production target by 1-million barrels per day to 27-million barrels per day in an effort to depress world oil prices. But the move had virtually no impact and was largely discounted as a symbolic gesture, since the cartel had already been pumping more than the new, higher quota calls for.

"Where's the relief valve?" Jamal Qureshi, an oil market analyst at PFC Energy in Washington, asked rhetorically.

Given the rising global appetite for oil, Qureshi said he does not expect prices to dip below $40 per barrel for any sustained length of time until next spring, assuming normal weather patterns this winter.

He estimated that global consumption has averaged 81.7-million barrels per day in the third quarter, up 2.8-million barrels per day from a year ago. Meantime, analysts believe the amount of surplus production capacity worldwide is about 1 percent of total demand.

On Aug. 19, crude futures closed at $48.70, the highest Nymex settlement price.