Crude Oil Futures Slip From High Levels

Associated Press
08.02.2004

Oil prices slipped Monday from recent lofty levels as jittery markets, already fearful of a disruption to Russian supply, reacted to warnings of terrorist attacks on U.S. financial centers.

The key Brent oil contract finished lower on the International Petroleum Exchange in London and September contracts for light crude were also lower in afternoon dealings on the New York Mercantile Exchange where they had closed at $43.80 a barrel on Friday, the highest level since trading began in New York 21 years ago.

"The heightened terror fears are hyping the market," said Deborah White, senior economist at Societe General in Paris.

U.S. authorities on Sunday warned that al-Qaida was planning attacks on five key financial institutions in New York, New Jersey and Washington.

The government said potential targets for the terror attacks included the Citigroup Inc. headquarters and the New York Stock Exchange in New York, the Prudential Financial Inc. building in Newark, N.J., and the International Monetary Fund and World Bank buildings in Washington.

Attacks involving chemical or biological weapons were seen as less likely, but U.S. officials said they would not rule anything out in beefing up security around the buildings.

However, some traders said the terror fear was overplayed.

Analyst Phil Flynn of Alaron Trading Corp. in Chicago said the weekend warnings may actually have helped reassure some market participants by showing that U.S. authorities are getting better intelligence to counter threats.

Analysts also said reports that Russian oil giant Yukos might get more time to pay a tax bill and simple profit-taking were behind falls in London and New York trading.

Crude futures for September delivery were down 20 cents at $43.60 a barrel Monday afternoon after briefly trading as high as $43.92 earlier in the day.

Taking into account inflation, oil prices would have to climb to about $57 per barrel to exceed the value of oil leading up to the Persian Gulf War. On Oct. 11, 1990, oil was priced at $40.42 per barrel, which in today's dollars would be equivalent to approximately $57.

On the International Petroleum Exchange in London, Brent crude for September delivery closed down 15 cents at $39.88 a barrel.

Yet most analysts expect a rise in prices over the coming weeks because of the unfolding Yukos saga, OPEC's decision to keep prices in a higher bracket and concerns about the growing cost of tapping ever more inaccessible fields.

"The geopolitical situation is not going to get better any time soon," said Investec oil expert Bruce Evers, noting that crude prices are nearly 35 percent higher than they were a year ago. "The world is going to have to get used to the changed situation."

Peter Westin, chief strategist at Moscow's Aton investment bank, also said a new plane had been reached.

"We have reached a new, structural high," he said.

Manouchehr Takin, an oil analyst at the Center for Global Energy Studies in London, said the fundamentals of the market are tight.

"Supply and demand are balanced, the levels of inventory are not low, but they are not high, they are lower than in the past, but the products are down, because refinery capacity cannot meet the high demand," Takin said. "Growth in demand this year and last year has been very strong all over the world."

The standoff between Yukos, which produces 2 percent of the world's oil, and the Russian authorities that threatens to shut down production is of major concern.

Crude prices were sent to record highs last week on news that bailiffs' orders against Yukos, Russia's biggest oil producer, could force the company to shut down production within a few days.

The struggling oil company has now been given a full month to pay off its crippling $3.4 billion back-tax bill for 2000 but was hit with a fresh blow Monday as tax authorities said they would begin a probe of its 2002 activities.

Flynn said the loss of Yukos' 1.7 million barrels a day of output would be difficult to replace with demand strong and other oil producers barely able to keep up.

"It has major impact. There is no replacement for this Yukos oil right now," Flynn said. "There is just nowhere to go - we can't look to Saudia Arabia or Mexico, there's no excess capacity to make it up. If we lose that oil we just won't get it back."

Much of Yukos' oil goes to Europe and is used for heating. If supplies were interrupted, Europeans would have to scramble to find alternate supplies, tightening supplies elsewhere.

Analysts are also worried about the ability of Iraqi security chiefs to protect that country's oil installations and China's surging economy and demand for fuel.

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