Oil prices make modest gains but remain capped by weak fundamentals

China (Platts) -- Dec 31, 2008 - Jan 06, 2009

By reporters at Platts, the energy information division of the McGraw-Hill Companies. For more information about Platts' information products in China, contact Platts at china@platts.com, or call its representative office in Guangzhou at (+86) 20 2881 6588.

Benchmark crude oil prices continued to make modest gains after the New Year holiday, but prices have yet to return to the $50/barrel level.

After setting a bottom at $33.87 on December 19, front-month WTI crude oil prices on the NYMEX have since recovered to $48.45/barrel as of Tuesday morning in Asia.

This compares with the all-time high of $145.29/barrel set on July 3 last year.

At the same time a year ago, prices were at $95.09/barrel.

Russia-Ukraine gas dispute underpins petroleum futures

The renewed strength in crude can be traced to a continued recovery in US middle distillates prices, which in turn has been triggered by the ongoing natural gas dispute between Russia and Ukraine, according to Platts analysis.

Front-month gasoil futures prices on ICE have climbed to almost $480/mt while NYMEX front-month heating oil prices hitched onto the gasoil rally late last week, settling at $1.58/gal last Friday.

The dispute between Russia and Ukraine over gas supplies continued to play into bullish sentiment across the petroleum complex.

European countries reliant upon gas from Russia will ultimately have to switch to fuel oil and heating oil if gas stocks dwindle.

News that Russian Prime Minister Vladimir Putin ordered state Gazprom immediately to cut gas pumped via Ukraine to Europe in response to Ukraine's alleged siphoning from transit pipelines have kept prices on an upward trajectory.

At the start of this week, the standoff between Russia and Ukraine took a new turn when Putin ordered gas giant Gazprom to reduce transit volumes to Europe.

Earlier, Gazprom had said Ukraine had refused to transit an additional 15 million cubic meters/d of gas to its European customers to compensate for a reduction in supplies resulting from Ukraine siphoning off Russian transit gas.

Ukraine siphoned off 25 million cu m of Russian gas on January 4, according to Gazprom said. "Start reducing it from today," Putin said, according to AFP.

For its part, Ukraine's Naftogaz said, "This is a threat to energy security of Ukraine and Europe, which could lead to unpredictable consequences to the whole European gas transportation network."

Naftgaz demanded that Gazprom stop "manipulation" of the gas transit network and synchronize operations in Russia, Ukraine and the EU.

To help compensate for the reduced volumes, Gazprom said it has increased gas supplies via the Yamal-Europe pipeline by 20 million cu m/d, and has also increased supplies by 6 million cu m/d to Poland via Belarus, and by 6 million cu m/d to Turkey via the Blue Stream pipeline.

In a move that underscores the critical dependence of Europe on Russian gas, on Tuesday (January 6), a delegation from the European Union was set to meet with representatives of Gazprom to discuss the supply dispute with Ukraine.

Analysts predict industrial consumers in Europe will start being affected by the supply shortfall in only a few days.

An analyst at Budapest-based KBC Securities explained, "Many countries report satisfactory natural gas inventories...[However,] the real problem is not the amount of gas in storage but the maximum speed of the offload. Taking gas from underground storage is typically too slow to cover the daily demand."

Israeli-Palestinian clash also adds to bullish sentiment

Prices have also reacted strongly to Israel's recent military action in Gaza.

Tens of thousands of Israeli troops battled Hamas fighters last Sunday in a campaign to end militant rocket attacks on Israel. The death toll has passed 500.

The heightened tensions between Israel and Hamas have fed into the current rally, as clashes in the Middle East - where about 30% of the world's oil reserves are located - tend to make futures traders nervous.

Uncertainty in the market has been exacerbated by Iran's call this week for oil producers to cut flows to Israel in response to the conflict.

Updated: January 06, 2009

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