(EnergyAsia, April 30, Monday) — Oil prices could be due for another run-up in the coming weeks to test the US$70 a barrel again as fuel demand climbs to its seasonal high while geopolitical uncertainties return to haunt crude supply. Front-month New York WTI crude futures have not seen the US$70 a barrel this year, but have been rising steadily over the past few months. The stage is being set in the coming months for a test of last July 14’s all-time high of US$78.40 a barrel.
The usual suspects are back: strong global demand, refinery problems and shutdowns, and political instability in Saudi Arabia and Nigeria. Occasionally, the other large producers, Iran, Venezuela and Russia, make helpful noises to scare prices higher. On Friday, April 27, WTI crude futures settled at US$66.46 a barrel, up $1.40 from the previous day.
The latest trigger came from Saudi Arabia which announced on April 27 that it had arrested 172 Islamic militants for plotting to attack the kingdom’s oil refineries. In one of the biggest crackdowns seen so far, police said they had arrested potential suicide bombers including several trained abroad as pilots. The arrests combined with large seizures of weapons and explosives came after several months of investigation.
Far from soothing oil traders around the world, the arrests highlighted the on-going threats to the crucial Saudi oil industry. If a major attack succeeds, analysts warn oil prices could easily shoot past US$100 a barrel.
The previous attempts by terrorists to disrupt Saudi oil flows came in February 2006 and May 2004. In February, they attacked but failed to damage the Abqaiq oil facility in eastern Saudi Arabia. In 2004, Al Qaeda gunmen stored the compound and offices of a US oil company in Yanbu city, resulting in the death of 22 people including 19 foreigners.
Nigeria, the world’s eighth biggest crude exporter, was the other geopolitical support for high oil prices last month. Ruling party candidate Umaru Yar’Adua won Nigeria’s presidential election as violence once again disrupted crude oil production and killed more than 200 people. The results have been rejected by the opposition, which could set the stage for more conflict ahead. Continuing violence has led to the shutdown of about 500,000 b/d of Nigerian crude output since early last year.
Meanwhile, the arrival of driving season and continuing problems with refineries mean that motorists in the US will likely see record US$4 a gallon gasoline in the coming weeks. Record gasoline prices, in turn, will support crude. US gasoline supplies have been falling for 11 straight weeks, said the Department of Energy. The latest report in late April shocked the market by showing that gasoline inventories fell by a substantial 2.8 million barrels, well below the average range compared with the same period last year.
OPEC could also be preparing to reduce crude production. Its 10 members, excluding Iraq and Angola, who are subject to output limits, are ready to reduce production by around 0.5% in April after over-selling their quota in March.
The continuing strength of the oil markets has left egg on the faces of some analysts. In February, Sanford C. Bernstein & Co had predicted crude to fall to US$40 a barrel in March, and could plumb US$30 a barrel thereafter.
Its London-based Neil McMahon had predicted that rising storage costs would force speculators to sell off their long positions. WTI then was hovering just under US$60 a barrel.
Instead, the sub-$60 market encouraged key players like the Chinese and US governments to build up stockpiles. That put a floor on oil prices, further fanning speculative buying instead of selling.