Oil drops below $118 a barrel with supply concern easing

Oil prices fell Tuesday amid expectations that a supply disruption in Britain would soon be resolved and as the U.S. dollar strengthened against the euro.

Light, sweet crude for June delivery fell 79 cents to $117.96 a barrel in electronic trading on the New York Mercantile Exchange by midday in Europe. The contract settled up 23 cents at $118.75 a barrel on Monday.

In London, Brent crude futures fell 96 cents to $115.78 a barrel on the ICE Futures exchange.

Nymex crude futures the previous day rose to a record $119.93 a barrel as labor actions in Nigeria and Scotland threatened crude supplies. But a pipeline that normally carries 700,000 barrels of crude a day to the U.K. is likely to be back in operation soon.

"The Forties pipeline shutdown in the North Sea is fully priced in and the market may be taking some mild profits on the basis that we'll see a return (of operation) ... in the near term," said Mark Pervan, a senior commodity strategist at the ANZ Bank in Melbourne.

The Forties Pipeline System was shut down by BP (nyse: BP - news - people ) PLC because of a 48-hour walkout by employees at a refinery in central Scotland. The refinery powers the onshore processing plant for North Sea crude coming through the network, and once the strike is over later Tuesday, the pipeline system should resume operation within a few days.

Oil prices also retreated from Monday's record as the dollar gained strength against the euro.

At midday in Europe, the euro stood at $1.5568, down from the $1.5645 that it purchased late Monday in New York. The British pound was down to $1.9738 from $1.9900 in New York.

The euro rose to a new all-time high of $1.6018 last week on continued concern about the U.S. economy.

"We're seeing a little bit of ... selling on the back of a firmer U.S. dollar and concerns that the dollar will maybe rebound mildly in the short term," Pervan said.

Energy investors will be closely watching the Federal Reserve's decision Wednesday on interest rates; lower rates tend to weaken the dollar. If, as expected, the Fed lowers a key interest rate by another quarter percentage point and signals that it will temporarily hold off on any future rate cuts, the dollar could strengthen, and oil might fall.

Pervan said the oil market has already priced in the expectation that the Fed will lower the interest rate by 25 basis points.

"There could be growing expectations that it could be the final cut for a while and that we'll see some upward momentum of the dollar," Pervan said.

Analysts also noted that the inability of the Nymex contract to breach the $120 mark was a possible sign that prices may have topped out for now.

"WTI needs to break $120 a barrel to maintain momentum but the resistance has been strong," said Olivier Jakob of Petromatrix in Switzerland.

Meanwhile, other supply concerns continue to support prices.

In Nigeria, workers at an Exxon Mobil Corp. (nyse: XOM - news - people ) joint venture cut production by an unspecified amount to demand more pay. The company notified clients it may not be able to meet its contractual obligations to supply oil, but said some production was not affected. Militant attacks on oil infrastructure have also cut production of Nigeria's light, sweet crude, which is easily refined. After years of attacks, Nigeria's output is dropping and the country can produce only about 75 percent of its official capacity of 2.5 million barrels per day.

"Nigeria's always a factor in oil prices, it's always had an ongoing issue with oil outages, but we're seeing a bit of an increased activity in militant attacks," Pervan said. "They'll keep a high floor on the price."

Also, union officials at the Grangemouth refinery in Scotland have said further industrial actions are possible if owner Ineos Group Ltd. doesn't back down in the dispute over pensions.

Mark Killick, spokesman for Ineos, also said restoring operations to the refinery could take as long as a month if there were problems reintroducing heat and pressure into the pipes.

In other Nymex trading, heating oil futures fell 0.57 cent to $3.2931 a gallon while gasoline prices lost 3 cents to $3.007 a gallon. Natural gas futures fell 19.9 cents to $11.130 per 1,000 cubic feet.

ExxonMobil meets Nigeria strikers

LAGOS, Nigeria -

Representatives of ExxonMobil Corp. met Monday with striking workers who have shut down oil production from the company's operations Nigeria, officials said.

Company spokesman Adeyemi Fakayejo said the negotiations were aimed at ending the walkout by white collar workers seeking better pay and benefits.

"The meetings are continuing," he said.

The strike began late last week, and the company said the stoppage had affected oil output. Fakayejo said Monday that he couldn't speculate on how much production the company had lost in Nigeria, Africa's biggest producer. ExxonMobil (nyse: XOM - news - people ) is the country's second-largest operator.

Separately, a militant group behind a group of pipeline bombings claimed that its latest attack had caused Royal Dutch Shell PLC (nyse: RDSA - news - people )'s Nigerian joint venture losses of about 350,000 barrels per day. Shell spokesman Precious Okolobo could not confirm the militants' claim, and it could not be independently verified. The militants cited an inside source for the information.

Okolobo said Shell doesn't provide daily production figures. He said the company was mobilizing clean-up and recovery efforts for spilled oil after the attacks.

Shell, which is Nigeria's largest oil company, said an earlier attack had cut about 169,000 barrels per day of crude.

Nigeria, Africa's biggest oil producer, is pumping crude at rates that are significantly below its capacity of 2.5 million barrels per day after militant attacks that began in 2006. The shortfall is adding pressure to oil markets that are reaching never before seen heights.

Oil Rises to Record on U.K. Pipeline Shutdown, Nigeria Attack

April 28 (Bloomberg) -- Crude oil rose to a record after BP Plc shut a North Sea pipeline and gunmen attacked a police station in Bonny Island, the site of one of Nigeria's largest oil and gas export terminals.

BP closed the Forties Pipeline System, carrying 40 percent of the U.K.'s oil output, after a strike at the Grangemouth refinery cut power supplies to the network that delivers 700,000 barrels daily. Five police were killed and guns and ammunition seized in yesterday's attack in the Niger Delta where output has already been halved by strikes and attacks on pipelines.

``The production affected at the moment is pretty substantial,'' said David Moore, commodity strategist at Commonwealth Bank of Australia Ltd. in Sydney. ``It all counts nowadays. The price would suggest the market is very tight.''

Crude oil for June delivery rose as much as $1.41, or 1.2 percent, to $119.93 a barrel in after-hours electronic trading on the New York Mercantile Exchange, the highest since the futures began trading in 1983. It was at $119.41 at 8:56 a.m. in Singapore.

The contract gained 2.1 percent to $118.52 a barrel on April 25 when the refinery strike and pipeline closure were announced. Refinery production will resume tomorrow morning local time. Units crucial to restart flows on the Forties pipeline will have priority, Richard Longden, spokesman for operator Ineos Group Holdings Plc, said yesterday.

Hedge Funds

Brent crude for June settlement rose $1, or 0.9 percent, to $117.34 a barrel London's ICE Futures Europe exchange and was trading at $117.30 a barrel at 8:55 a.m. in Singapore. It reached a record $117.56 on April 25.

New York oil futures are 79 percent higher than a year ago, with almost a quarter of that gain booked this month as the falling dollar and declining U.S. gasoline stockpiles spurred fund managers to invest in fuel and crude oil.

Hedge fund managers and other large speculators increased bets on rising oil prices a third time in the week ended April 22, according to U.S. Commodity Futures Trading Commission data.

Oil grades from the North Sea and Nigeria, Africa's biggest producer, are low in sulfur and favored by refiners. Nigeria is losing about 50 percent of its output after staff at Exxon Mobil Corp.'s operations went on strike April 24 and militants attacked a Royal Dutch Shell Plc pipeline later the same day.

Nigeria pumped 1.96 million barrels a day in March, according to Bloomberg estimates. Recent attacks on Shell-run pipelines, including the latest one, are cutting oil flows by about 140,000 barrels a day, the country's oil minister H. Odein Ajumogobia said April 25. The Exxon Mobil strike is halting about 765,000 barrels a day, according to union estimates.

Risks

Production losses in the North Sea will dominate the oil market this week, and ``there's a risk of further problems still ahead'' in Nigeria, Commonwealth Bank's Moore said.

Oil prices are likely to fall to ``more realistic levels'' once the Forties pipeline has re-opened, said Ben Barber, a broker at Bell Commodities Ltd. in Melbourne. U.S. stockpiles and the dollar are rising and there is a risk prices will fall this week if the Federal Reserve signals an end to recent interest rate cuts.

``Oil is quite susceptible,'' he said.

The Federal Reserve will probably cut its target lending rate by a quarter-point to 2 percent on April 30, according to futures traded on the Chicago Board of Trade, the smallest reduction in four months.

To contact the reporter on this story: Gavin Evans in Wellington at gavinevans@bloomberg.net

Crude Oil Trades Above $113 as Investors Turn to Commodities

By Mark Shenk

April 16 (Bloomberg) -- Crude oil was little changed above $113 a barrel in New York after touching a record yesterday as investors purchased commodities because their returns have outpaced stocks, bonds and other financial instruments.

Oil climbed to $114.08 a barrel yesterday, the highest since futures began trading in 1983. Rising global demand for raw materials and a weakening dollar have led to record prices this year for commodities including corn, rice and gold. China said yesterday diesel imports surged 49 percent in March.

``Developing countries are still growing, which is boosting demand for metals, grains and energy,'' said Eric Wittenauer, an energy analyst at Wachovia Securities in St. Louis. ``It makes sense for investors and hedge funds to invest in these commodities with the weakness of other markets.''

Crude oil for May delivery fell 26 cents to $113.53 a barrel at 9:09 a.m. Sydney time in after-hours electronic trading on the New York Mercantile Exchange. Oil closed at a record $113.79 a barrel yesterday.

Gasoline for May delivery yesterday climbed 5.92 cents, or 2.1 percent, to settle at a record $2.881 a gallon in New York. Futures earlier touched $2.89, an intraday record for gasoline to be blended with ethanol, known as RBOB, which began trading in October 2005.

U.S. pump prices are following futures higher. Regular gasoline, averaged nationwide, rose 1.3 cents to a record $3.3386 a gallon, AAA, the nation's largest motorist organization, said yesterday on its Web site.

U.S. Inventories

An Energy Department report today is forecast to show that U.S. gasoline inventories dropped 1.8 million barrels last week, according to the median of 16 responses in a Bloomberg News survey. Crude-oil supplies advanced 1.8 million barrels, the survey showed.

``This is where the funds want to be,'' said Daniel Flynn, a broker with Alaron Trading Corp. in Chicago. ``Rate cuts and a weak stock market make commodities very attractive.''

The UBS Bloomberg Constant Maturity Commodity Index, which tracks 26 raw materials, gained 0.9 percent to 1502.886 yesterday. It's up 35 percent from a year ago.

Oil in New York surged 79 percent over the past year as the Standard & Poor's 500 Index dropped 8.5 percent and the Dow Jones Industrial Average declined 2.3 percent.

``It doesn't look like there's anything to get in the way of the oil market,'' said Chip Hodge, a managing director at MFC Global Investment Management in Boston, who oversees a $4.5 billion energy-company bond portfolio. ``As long as the dollar goes lower, more money will go into commodities.''

Energy Stocks

Exxon Mobil Corp. and Chevron Corp. led energy shares to the highest level since January because of rising oil and gasoline prices. Exxon, the biggest U.S. oil company, climbed $1.10 to $90.80. Chevron, the country's second biggest, added 87 cents to $90.17.

The Organization of Petroleum Exporting Countries left its forecast for 2008 oil demand at 86.97 million barrels a day, a 1.2 million barrel-a-day gain over 2007, according to the group's monthly demand report yesterday. OPEC's 13 members produce more than 40 percent of the world's oil.

China, the world's second-largest energy consumer, increased diesel imports as state refiners China Petroleum & Chemical Corp. and PetroChina Co. bought more to ensure supplies for the spring planting season.

Chinese oil demand this year will rise 4.7 percent to 7.9 million barrels a day, the International Energy Agency said in a report on April 11. Demand in the U.S., the world's biggest- energy consumer, will contract 2 percent to 20.38 million barrels a day this year.

No Plans

OPEC has no plans to review output levels before a scheduled meeting in September, though ministers will have an opportunity to discuss the oil market with consuming nations at an International Energy Forum in Rome scheduled for April 20-22.

``We are not producing enough oil,'' U.K. Prime Minister Gordon Brown said yesterday on Sky News in London. ``We can take collective action to persuade OPEC and others to get the oil price down.''

Brent crude for May settlement rose $1.47, or 1.3 percent, to $111.31 a barrel on London's ICE Futures Europe exchange yesterday, a record close. The contract touched $112.08 a barrel, the highest intraday price since trading began in 1988.

Petroleos Mexicanos, the third-largest supplier of crude oil to the U.S., reopened three of its oil-export terminals on the Gulf of Mexico after closing them April 13 because of heavy winds and rain.

Pajaritos, Cayo Arcas

The terminals at the ports of Pajaritos and Cayo Arcas opened yesterday morning, said Martha Avelar, a spokeswoman for Mexico City-based Pemex, as the company is known. The terminal at the port of Dos Bocas reopened yesterday afternoon. The Pacific port of Salina Cruz is still closed, Avelar said.

U.S. supplies of distillate fuels, a category that includes heating oil and diesel, fell 1.65 million barrels last week, the Bloomberg News analyst survey showed.

Heating oil for May delivery rose 7.1 cents, or 2.2 percent, to settle at a record $3.2739 a gallon in New York yesterday. Futures touched an intraday record of $3.3204 a gallon on April 10.

To contact the reporter on this story: Mark Shenk in New York at mshenk1@bloomberg.net.