Crude prices hug the flat line - Traders await BP decision on Prudhoe Bay oil deliveries

NEW YORK (MarketWatch) -- Crude-oil prices hovered around the flat line Friday as traders weighed demand concerns linked to heightened terrorism fears against an uncertain supply outlook.

Much of BP's Alaskan production remains halted, while continued tensions in the Middle East and more oil-related kidnappings in Nigeria also factor into energy traders' thinking.

Crude for September delivery was last off 5 cents at $73.95 a barrel, after ending Thursday's New York Mercantile Exchange session at a near two-week low. The contract rose early in the session to touch a high of $74.81 in electronic trade.

Gasoline futures bounced back, up 4.61 cents at $2.035 a gallon, after logging the lowest close for a front-month contract since mid-May.

"Once we broke down below $75, technically it was a pretty bad break for the market," said Mike Guido, head of hedge-fund marketing for commodity sales at Societe Generale. "You can probably correct this market down to the low seventies, possibly $70 again before confident bets come back into the market."

Guido said crude buying is also being hampered by an emerging consensus that the Fed's decision not to raise interest rates is signalling that we are going to see a more pronounced economic slowdown in the fourth quarter and heading into 2007. A slowing economy would imply lower demand for energy products.

"We're also in very quiet season right now. There are lot of players out of the market. We have a very minimal amount of participation,' he added, in explanation for the modest move in the contract in Friday trading.

The impact of the foiled airplane-bombing plot on jet-fuel demand could last quite a long time, according to UBS analyst Jon Rigby.

"At least half of the United Kingdom's 400,000 barrels per day jet fuel demand was cut on Thursday," said Rigby. "Add in big delays at airports everywhere and there is likely to be a swift and significant negative impact on jet fuel markets."

Rigby noted that in the nearly five years since the Sept. 11 2001, terrorist attacks, "Atlantic Basin jet fuel demand has barely recovered." Prior to the attacks on the World Trade Center and the Pentagon, jet fuel demand was growing, on average, at a 3.7% annual rate.

Conversely, gasoline demand tends to get a lift from air-travel scares, Rigby said, noting: "After September 11, gasoline demand growth almost completely compensated for losses in jet fuel use."

The Bank of England, meanwhile, froze the financial assets and released the names of 19 out of the 24 people held in custody on suspicion of being involved in the terror plot to blow up several U.S.-bound planes.

Separately, the U.S. advised its citizens in India to adopt a low profile as it warned of possible terror attacks there as the country prepares for its Independence Day celebrations on Aug. 15, the BBC reported.

Meanwhile, diplomatic efforts to secure a cease-fire in the conflict between Israel and Lebanon and the militant group Hezbollah intensified. Secretary of State Condoleezza Rice's heading to the United Nations as negotiations on a resolution calling for an end to the fighting appeared continued. French Foreign Minister Philippe Douste-Blazy said that a deal on the wording of the text was imminent, according to news reports.

But Russia said agreement may still be a long way off and is now pushing its own plan for a three-day humanitarian truce, the BBC reported.

Israel, meanwhile, continues to bomb Hezbollah positions in southern Lebanon as Hezbollah rockets again rained down on northern Israel.

In one key piece of news of interest for consumers and traders alike, the latest assessment from BP executives over the likelihood of maintaining crude deliveries out of its Prudhoe Bay operations in Alaska is likely to ease some supply concerns in the market.

Company officials said late Thursday that it might be able to keep oil flowing from the west side of the Prudhoe Bay oilfield, the Associated Press reported. BP shut down the eastern portion of the field after discovering an oil spill and corrosion in a pipeline. The shutdown knocked out some 200,000 barrels per day in output. Alaskan crude is used almost exclusively to serve the needs of customers on the West Coast of the U.S.

Around 140,000 gallons of crude a day are still flowing out of Prudhoe Bay, the AP said, quoting Craig Wiggs, a performance unit leader for BP. The company will make a decision by the end of the weekend on keeping the west side open, which would allow BP to maintain its 140,000-barrel capacity and possibly allow to raise output to 185,000 barrels while it carries out repairs to the corroded transit pipeline on the eastern side, the AP said.

Looking at demand, the International Energy Agency held to its 2006 demand forecast of 84.8 million barrels of oil a day, with Chinese increases making up for downward data adjustments in the U.S. and relative demand weakness in Europe and Japan.

In the current environment, the Paris-based agency added, crude quality rather than overall output is the issue after the BP outage in Alaska. "For the time being, the market can cope with current outages, but in the light of the many possible threats to output, including the current hurricane season, there is little doubt that the upstream spare capacity cushion remains thin," the IEA said.

There will be concern about a fresh spate of kidnappings in Nigeria. A Belgian and a Moroccan have reportedly been seized by gunmen on the outskirts of Port Harcourt, according to news reports. The latest abductions come just days after two Norwegians and two Ukrainians were abducted at gunpoint.

Local militants looking to gain more regional control of the Niger Delta's rich oil resources are thought to be behind the kidnappings. They have also engaged in sabotage attacks on installations there that have cut into Nigeria's oil production, pegged at 2.5 million barrels a day, by around 20% to 33%, according to various estimates.

Elsewhere in the energy complex, natural-gas prices fell as traders continued to lock in profits following a run-up sparked by the heat wave last week and the threat of a storm hitting oil and gas installations in the Gulf of Mexico.

"Storage numbers are getting a little bit more bullish," said Guido of Societe Generale. "The reports are coming in with draws against a five-year average of builds. You also have between now and November 1, huge event risk for not only storms but also for more heat."

On Thursday, the Energy Department said natural-gas stocks fell by 12 billion cubic feet for the week ended August 4.

In metals trading, gold futures erased early gains to trade lower. The benchmark December contract was last down $3 to $643.

Taking a broad measure of the commodity-futures markets, the Reuters/Jefferies CRB Index was off 0.5% at 346.16.

"Much of BP's Alaskan production remains halted,"

An investigation needs to be launched into BP.
I smell a rat here.
I have never trusted those suckers.

An investigation by state and federal officials has already been launched, started back in March when the first big leak started. The latest is the result of the mandated smart pig investigation. That is how they found the damage to be so extensive.

I'm sure there will be many investigations.

I almost think the best thing that can happen is we flatten Saudi Arabia and Iran and then force ourselves to make a go at alternative energy sources and drilling our own fossil fuels.

Think how the world would change if we were now an exporter of 8 million barrels a day.

5 posted on 08/11/2006 11:04:33 AM PDT by EQAndyBuzz (Democrats - The reason we need term limits)

So the article basically summarized says :

1. Oil could go all the way down to $71 a barrel before the traders decide to make it skyrocket back up again. Wow, what a great price. I have no idea what I'm going to spend all of the fabulous savings on. Oh wait, yes I do. Number two.

2. Natural gas prices are being talked back up so I can get reamed on that end. Whoopee.

It's all supply and demand. OPEC, oil companies, and government choke the supply, and then they demand we pay more for it.

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