OIL UPDATE: Nymex Extends Gains On War Uncertainty
DOW JONES NEWSWIRES Tuesday March 25, 2:20 PM By Irene Kwek Of DOW JONES NEWSWIRES
SINGAPORE (Dow Jones)--Crude oil futures continued to extend gains in after-hours trading Tuesday, as growing concerns of a prolonged war against Iraq and worries over Nigerian oil output helped to lift the entire petroleum complex.
Front-month May crude futures headed higher in Access trade during most of the Asia day, and hit a session high at $29.05 a barrel. At 0600 GMT, Nymex May was up 34 cents at $29.00/bbl after surging 6.5% during floor trade Monday.
"It's relatively bullish with the fundamental underlying strength coming from Nigeria and the Iraq (war)," a broker said, adding that he expected the buying from London and U.S. traders to continue later in the day.
Initial resistance for the front-month contract was at $29.50/bbl, and then at the 200-day moving average of $29.63/bbl, the broker added.
"The realization set in that this would be a longer war than the enthusiasm showed in the market last week," a U.S.-based broker said.
The gains by crude helped to lift Asian oil product prices. Singapore fuel oil cash prices were pegged at $170-$171 a metric ton from $164.50/ton Monday. Fuel oil swaps climbed to $161.25-$164.50/ton from $157.50/ton Monday.
Open-spec naphtha outright prices were pegged at $281-$283/ton for second-half May, cost-and-freight Japan, compared with $273.50/ton done Tuesday.
Rally Likely To Continue
Looking ahead, analysts and traders expect Nymex crude futures to retest the key $30/bbl level.
"It will probably trade back up and go toward. $30/bbl... It's up almost $2/bbl (since Friday), and it may even go up to $30/bbl tomorrow," the U.S.-based broker said.
Moreover, a flight to quality from investors due to fears of a long war will help support the bullish trend.
"There are signs of the flow of money out of stocks and into gold, commodities. We would see some amount of buying in crude in line with the flight to quality," the broker added.
"It's going to be on the upside because it looks like the war is going to keep dragging on longer than what people have been expecting," echoed a Merrill Lynch energy analyst.
"But the other thing that could keep oil prices in check is that we are not witnessing any destruction of Iraqi oil production facilities and the disruption of oil exports from the Persian Gulf," the analyst noted.
In a report distributed Monday, Merrill Lynch said it adjusted its 30-day range for crude prices downwards to $26.25-$33/bbl "to account for the lack of debilitating supply impact since the onset of hostilities."
Nigerian Oil Output
Further fueling the rally, problems in Nigeria lent further support to the bullish sentiment as ethnic violence has sharply curtailed the country's oil output by as much as 40%. Shell Development Petroleum, a unit of Royal Dutch/Shell (RD) Monday said it shut in 370,000 bbls a day in crude output.
Nigeria was the fifth-largest exporter of crude oil to the U.S. in January, and its crude is valued for high gasoline yields.
May gasoline futures staged a 1.07 cent gain during Access trade to 89.99 cents/gallon at 0542 GMT, underscoring concerns of tight gasoline supplies as the U.S. moves towards its driving season.
In its report, Merrill Lynch noted that the partial outage in Nigerian production highlighted limited spare production capacity among the Organization of Petroleum Exporting Countries, which have been strained by strikes in Venezuela earlier in the year and Iraq, starting last week.
The disruption in Iraq and Nigerian oil output has taken about 3 million barrels/day out of the market. Saudi Arabia and other producers have made up that shortfall, but their ability to absorb shocks is almost exhausted as they are already producing beyond their sustainable capacity.
Despite the reduction in oil output from both Iraq and Nigeria, market participants said they didn't expect a release of stocks from strategic reserves.
"I don't see any sell off" or the market pricing in such a release, said one broker. "If anything, the market is anticipating very little out of the strategic reserves."
The U.S. administration said it is watching Nigeria's oil supply disruption and the broader oil market closely, a U.S. Department of Energy spokesman said late Monday.
The Bush administration maintains that the U.S. hasn't experienced an energy supply disruption severe enough to warrant emergency release of crude oil from the U.S. Strategic Petroleum Reserve, the spokesman said.
On the Iraq war front, market participants are taking account of reports that the oil fields in southern Iraq aren't as secure as assumed last week. Fighting around burning oil wells in the Rumaila oil fields has driven out civilian firefighters, days after they were secured by coalition forces, an official said Monday.
Meanwhile, the Kirkuk oil fields in the Northern remain under Iraqi government control.
-By Irene Kwek, Dow Jones Newswires; +65-64154062; irene.kwek@dowjones.com