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Tuesday, October 05, 2004

LACK OF SWEETS SOURS THE MARKET

The price per barrel of oil pushed up above $51 today -closing in at $51.09 on the NYMEX futures exchange- yet there seemed to be no obvious cause for the record close. The geopolitical hotspots which have kept the market on edge in past weeks -Venezuela, Russia, Saudi Arabia, Iraq, Nigeria- remained relatively quiet. The U.S. even sounded a conciliatory tone when faced with Iran's announcement that they have long range missiles.

While Nigeria and Iraq -the most acute of the bunch- both remain tense, the threat to the oil in both places seems diminished. In Nigeria the rebel Ijaw have declared that oil will not be a focus of their aggressions and a provisional deal has been struck with the government, while in Iraq the violence, as bad as it is, has been neither in key oil producing areas, nor focused on economic disturbances as opposed to military disturbances. The Iraqi insurgents clearly believe that increasing U.S. and Iraqi military and police casualties is the name of the game if they are ultimately to expel the United States.

So why the high prices? Most likely the culprit is the previous underestimation of the toll that Ivan would take in the Gulf. Analysts now predict that when all is said and done, 17 million barrels of crude will have been shut in by the storm. And this supply hit comes at precisely the time when fuel stocks are expected to rise in anticipation of the winter months ahead and the very crude that was held from the market is the sweet crude necessary for distillate and heating fuels. While off shore sours were back on line, the Louisianan Heavy Sweet produced Royal-Dutch Shell's Ram-Powell platform remained shut-in.

It is also the sweet crude necessary for world second most voracious consumer of oil, the Chinese, to purchase for their refineries. Although Beijing is slowly upgrading its refinery capacity, it currently has only a few refineries that can desulfer more sour crudes. It thus remains particularly dependent upon sweet crudes, primarily from Nigeria -the most serious hot spot of late- and the smaller Persian Gulf states. The combination of sweet crudes coming off the market just when sweet crudes are in greatest demand has likely caused the price per barrel to hit its record.

Adding further credence to this explanation is the sweet/sour differential on world markets. While the Saudi's tried to calm world markets recently by bringing their final 1 million bbl/d spare capacity online, the market wasn't much impressed. Despite the Saudi mantra that "a barrel is a barrel is a barrel", no one was much impressed with the sour Saudi crude. In fact, Louisiana Heavy Sweet was trading last week at a $0.70 to $0.80 per barrel premium over West Texas Intermediate, which itself was trading at a $9 per barrel premium to Mars blend sour.

Many analysts are predicting that the price pressures will only increase and that $60 oil is looming. Despite the current price pressures, this seems a bit bullish -or panicky, depending on your perspective. Gulf of Mexico oil will soon be back on line, and the turbulence in Nigeria seems to have ebbed for now. And, of course, $50 dollar oil will take its toll on the demand side, as Europe and Asia in particular struggle under the weight of such heavy oil prices.

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