Threat of Storm, Persian Gulf Tensions Boost Oil, Gas Prices

Crude oil rose more than 5% to $35.92 a barrel, reaching a 10-year high for the second time this week, on tensions in the Persian Gulf, speculation that President Clinton will not tap the strategic petroleum reserve and concern that a storm will intensify as it moves toward U.S. rigs and refineries along the Gulf of Mexico.

The storm threat also pushed up natural gas prices to a record, based on concerns that the weather system could disrupt output from rigs in the Gulf of Mexico, which account for a quarter of U.S. supply. The gas industry is now attempting to stockpile inventories for the upcoming winter heating season.

In the Middle East, Iraq has accused Kuwait of pumping oil from a field that Iraq claims as its own. Kuwait disputes the charge. Tensions in the region, and the possibility that U.S. crude oil production and refining could be disrupted by a storm, come with inventories 6.8% below year-ago levels.

“We have Kuwait and Iraq pointing fingers at each other,” said Al Zappulla, a trader at ABN Amro Inc. in New York. “We are very susceptible to any news from that region right now. It’s the only place we can get additional oil from.”

Crude oil for October delivery rose $1.85, or 5.4%, to $35.92 a barrel on the New York Mercantile Exchange. Prices rose as high as $36 for the first time since October 1990, after Iraq invaded Kuwait and touched off the Persian Gulf War. Oil rose $2.29, or 6.8%, this week.

Friday’s price rally accelerated after Clinton said he didn’t think the nation faces a recession because of high energy prices. His remarks sparked concern that the government wouldn’t soon sell oil from national reserves to ease tight supplies, as had been expected.

“I think in the short to medium term, the answer . . . is no,” Clinton said when asked whether Americans should be worried that high oil prices could lead to a recession.

Oil traders believed Clinton’s comments made it less likely that the administration would release oil from the Strategic Petroleum Reserve to counter rising crude prices.

The 571-million barrel reserve was created in the early 1970s after the Arab oil embargo, to be used in case of emergencies.

U.S. crude oil stockpiles recently hit a 24-year low and analysts are worried that shortages of heating oil might hit the Northeast this winter unless oil supplies increase.

But the administration has steadfastly taken the position that it would not use the reserve to influence oil prices. White House spokesman Joe Lockhart said, however, the administration hadn’t ruled out tapping the nation’s stockpile.

The Organization of Petroleum Exporting Countries agreed Sunday to its third increase since March, a boost of 800,000 barrels, or 3.2%, to daily quotas. Oil prices this year have jumped 43%. Most of OPEC’s extra capacity is held by Saudi Arabia, the world’s top producer.

Iraq said Kuwait had been drilling in the border zone between the two countries to draw oil from Iraqi reserves. Kuwait said Iraqi planes flew close to the Kuwaiti and Saudi Arabian borders, violating a no-fly zone. In response, Secretary of State Madeleine Albright warned of an “appropriate” response if Iraq attacks or threatens its neighbors.

The United States and Britain have enforced a ban on Iraqi aircraft in northern and southern areas of the country since the war, in which the U.S. and its allies repelled the Iraqi invasion of Kuwait.

Meanwhile, the National Weather Service said a tropical system with winds of 35 mph was moving into the Gulf from Mexico’s Yucatan Peninsula and could strengthen into a tropical storm over the next few days. Private forecasters said high-altitude winds will probably keep the storm from getting too strong.

Although any disruption by the storm to offshore gas production would slow the build-up of inventories needed for winter, some traders said the threat was slim.

Some reports suggest “a low probability of impacting energy operations,” said Perry Piazza, a gas futures trader at Citibank in New York. “Others say there’s a chance it may affect some by Sunday night.”

Natural gas for October delivery rose 1.1 cents, or 0.2%, to $5.206 per million British thermal units on the New York Mercantile Exchange, the highest closing price in the 10 years that gas has traded on the exchange. Prices have more than doubled this year and have been at or close to record levels for more than three weeks on concern that inventories will be too low for the winter.

Prices retreated from a record intraday high of $5.34 per million BTU on speculation that the storm could dissipate before reaching gas fields 500 miles to the north.

If the storm subsides, “we could very well head down to $5 again,” said Damian Jee, a gas trader at Bank of America in New York. “We’ve seen some really brutal sell-offs on Monday mornings when tropical weather events don’t happen.”

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Gassing Up

A tropical storm in the Gulf of Mexico, where offshore rigs produce a quarter of the natural gas used in the U.S., is the latest worry for a market roiled by low inventories and booming demand.

Natural gas futures prices since January 1999, in dollars per million British thermal units:

Friday close: $5.206

Source: Bloomberg News