Oil Slips From Record High,
But Up 46% Year to Date
Prices Up Almost 39% For Second
Production Concerns Grow
MYRA P. SAEFONG & POLYA LESOVA / MarketWatch 30jun2008
SAN FRANCISCO — Crude-oil futures closed lower Monday, below the fresh record above $143 a barrel reached early in the trading session, but ongoing global production and supply concerns helped prices finish the first half of the year with gain of almost 46%.
Crude prices climbed to an all-time high of $143.67 a barrel during Globex electronic trading Monday, supported by tensions in the Middle East, concerns about Nigerian production and ongoing talk about U.S. government control over speculative trading in the commodities markets.
But prices retreated as the U.S. dollar regained some lost ground and a fresh record in retail gasoline prices prompted concerns about consumer demand.
The August crude contract closed at $140 a barrel, down 21 cents for the day on the New York Mercantile Exchange.
But crude futures were 45.9% higher year-to-date, after ending last year at $95.98. Prices are up 37.8% for the second quarter and 9.9% higher for the month of June.
"U.S.-Iran tension is still a major concern and could have a substantial impact on the market if military action takes place," said Jeff Pritchard, an analyst at Altavest Worldwide Trading, in emailed comments.
In the Middle East, "the war of worlds between Israel and Iran has moved up another notch, with Iran stating outright that shipping in the Persian Gulf, specifically the Strait of Hormuz, will be affected if it is attacked," John Kilduff, an analyst at MF Global wrote in a note to clients.
In a research note, Edward Meir, also an analyst at MF Global, said a local newspaper reported that Iran would attempt to impose control on vital shipping lanes in the Persian Gulf if the country was attacked, and the Iranians also warned regional states of reprisals if they took part in any action against it.
Gen. Mohammad Ali Jafari, chief of Iran's Revolutionary Guard, issued a new warning against Israel not to attack it, saying the Jewish state is well within range of its missiles, according to a weekend report by AFP, which cited a local newspaper.
Separately, an article in The New Yorker magazine over the weekend reported that the U.S. has stepped up the pace of covert action taken inside Iranian territory. See full story.
"Due to the short trading week in the U.S., price movements [for oil] will be exaggerated but likely by the end of the week, oil will see widespread short covering ahead of the long holiday weekend," said Kevin Kerr, president of Kerr Trading International. "Much will depend on the dollar and this week's [U.S.] inventory report" due for release Wednesday, said Kerr, who also edits Global Resources Trader, a MarketWatch newsletter.
More price pluses
In Nigeria, Royal Dutch Shell denied local reports of a weekend attack on its oil flow stations, according to Reuters. Several Nigerian newspapers had reported an attack by suspected militants on a houseboat owned by Shell and another report said flow stations were hit.
Violence in Nigeria is an ongoing concern. Shell's production at a main offshore oilfield in Nigeria has still not returned to full capacity following an attack by militants earlier this month, according to AFP.
The efforts of rebels from the Movement for the Emancipation of the Niger Delta (MEND) have managed to remove up to 20% of Nigeria's production, Kilduff said.
So "it is not a wild leap of imagination to think what a more organized military could do to the Strait [of Hormuz], through which 25% of the world's oil transits," he said.
Continuing weakness in the U.S. dollar has been another of the key reasons behind the price surge seen in greenback-denominated crude.
But the dollar edged up against other major currencies on Monday, with the dollar index, which tracks the performance of the greenback against a basket of other currencies, rising to 72.509, compared with 72.306 late Friday.
"Despite all the heated political rhetoric from the likes of Iran this week and Libya last week, the dollar remains the primary upside driver in crude for the moment while the Fed just stands by," Meir said.
The dollar, however, found some support Monday at "about the 72.40 level and bounced from the lows it made this morning, which put pressure on the new highs made in the crude oil market," Altavest's Pritchard said.
Pressed by their constituents to do something about record-high oil and gasoline prices, some U.S. lawmakers have said that financial speculators, aided by loose regulatory oversight, have driven up prices beyond levels supported by supply and demand. Several have proposed legislation to curb their investment abilities.
In other energy-related news Monday, Tony Hayward, the chief executive of BP, said oil supply was not responding to higher demand and the argument that speculators were to blame for record oil prices is a "myth," Reuters reported, citing comments made at the meeting of the World Petroleum Congress in Madrid.
Demand pays price
The record-high prices for crude have driven prices for retail gasoline to all-time highs as well.
The average U.S. retail price for a gallon of regular gasoline climbed to a fresh record level of $4.086 on Monday. That's up 40% from a year ago, according to AAA's Daily Fuel Gauge Report.
Motor gasoline demand averaged about 9.3 million barrels over the last four weeks, down 2.1% from the same period a year ago, according to a report from the U.S. Energy Department released last week.
In its Medium-Term Oil Market Report, the International Energy Agency said it will lower its global demand estimate for 2008 to 86.87 million barrels per day. That's down 1.4 million from the estimate the IEA offered a year ago. It attributed the lower estimate to high oil prices as well as expectations for weaker economic growth. MarketWatch reported some details of the report on Monday, but it is scheduled to be unveiled on Tuesday.
Prices for July reformulated closed almost flat at $3.5015 a gallon on Nymex. Front-month contract prices are up over 41% year-to-date. July heating oil rose 0.4 cent to end at $3.9029 a gallon, with futures prices 47.6% higher than the end of last year.
The July contracts expired at the close of trading Monday. August reformulated gasoline closed the session up 1.8 cent at $3.4991, while August heating oil added 2.3 cents to finish at $3.91.
August natural gas futures rose 15.5 cents to close at $13.353 per million British thermal units. Front-month futures contract prices are up 78.4% year to date.
Gold futures closed lower Friday, but they were up almost 11% year to date. See Metals Stocks.
Corn futures fell after the U.S. Department of Agriculture reported a surprise increase in acreage. See Food Futures.
Myra P. Saefong is MarketWatch's assistant markets editor, based in San Francisco. Polya Lesova is a MarketWatch reporter based in New York. Update includes a correction of the time of release of International Energy Agency report.