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The Wall Street Journal: Oil Prices Surge on News Of Alaskan Field Shutdown

Markets Brace For Possibility
That Repair Could Take Weeks
August 7, 2006 1:17 p.m.

Oil prices jumped by more than $2 a barrel Monday following a shutdown at an Alaskan oil field that accounts for about 8% of daily U.S. production.

Gasoline futures also rose, and experts expect prices at the pump to increase by about 10 cents a gallon.

BP Exploration Alaska Inc., a unit of BP PLC, began shutting down 400,000 barrels of daily oil production Sunday at Prudhoe Bay, in Alaska’s North Slope region, due to severe corrosion on a pipeline.

While BP officials haven’t yet estimated how long it will take to get the oil flowing again, market watchers are bracing for several weeks — maybe even months — of blocked production.

Light, sweet crude for September delivery on the New York Mercantile Exchange climbed $2.39 to $77.15 a barrel in midday trading Monday — on track for a new nominal record, breaking the previous high of $77.03 set on July 14.

About 90% of the Alaskan production serves refineries on the West Coast, said Fimat USA analyst John Kilduff, and that region will see the most substantial price increases, as refiners will need to import crude oil from the Gulf coast and Asia.

The average U.S. retail price of a gallon of unleaded, regular gasoline was $3.036 on Monday — near its all-time high of $3.057, reached Sept. 5 after Hurricane Katrina hit the Gulf Coast.

“I suspect that record will fall in the next 48 hours,” said Tom Kloza, an analyst at Oil Price Information Service in Wall, N.J., noting that pump prices around the country are likely to rise 5 to 10 cents a gallon.

In March, a BP transit line in the North Slope spilled 267,000 gallons of oil. It was a month before BP was able to install a bypass on that line to resume operations. BP is currently under criminal investigation for that spill.

“It makes you wonder, if this time the pipeline will be shut down longer than it was in March because inspection will be more stringent,” said Phil Flynn, analyst at Alaron Trading Corp. in Chicago.

Heating-oil futures rose 3.85 cents to $2.27 a gallon. Gasoline futures rose 6.44 cents to $2.1540. Natural gas fell 29.6 cents to $6.95 per 1,000 cubic feet.

The U.S. government said Monday it would offer oil from its Strategic Petroleum Reserve, which has about 700 million barrels in storage on the Gulf Coast, if requested.

BP’s production shutdown adds to the list of supply worries that are currently buoying oil prices: the potential for storms in the Gulf of Mexico, violence in the Middle East and unrest in Nigeria, Africa’s biggest oil producer.

On Monday, the violence between Israel and Hezbollah guerrillas in Lebanon neared its fifth week. While diplomatic efforts were intensifying at the United Nations, the fighting continued unabated.

Tetsu Emori, chief commodities strategist at Mitsui Bussan Futures in Tokyo, said BP’s reduction in output would have a major impact on oil prices.

“Oil prices could increase by as much as $10 per barrel given the current environment,” Mr. Emori said, though he said it was too early to tell what would be the exact effect.

Mr. Flynn estimated the premium on oil futures would be less — probably a couple of dollars — but if the shutdown lasts for months, oil could rise above $80 a barrel.

Crude prices rose to an intraday record $78.40 a barrel on July 14 on worries that Iran could cut supplies if it gets involved in the fighting in Lebanon and Israel.

Oil prices are now roughly 26% higher than a year ago, but still below all-time inflation-adjusted highs of about $90.

BP shares fell nearly 2% in midday trading, while shares of the BP Prudhoe Bay Royalty Trust, which makes its money from assets in the North Slope, fell nearly 11%.

Victor Shum, an energy analyst with Purvin & Gertz in Singapore, noted U.S. crude inventories are at a 5-year high. “But the market is in very high anxiety, so a real disruption affects the prices, even if there is no threat of a supply shortage,” Mr. Shum said.

Bill Ramsay, a senior official at the International Energy Agency, told Dow Jones Newswires that the BP shutdown was troubling but not catastrophic for global oil supplies, because higher oil prices could prompt producers with spare capacity such as Saudi Arabia to release more oil onto the market.

Write to Anna Raff at [email protected]

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