The Malacca Strait is the narrow channel that separates Malaysia from Indonesia, and carries a third of the world’s seaborne oil. (image: sabrizain.org)

Singapore’s navy issued an advisory saying it had “received indication” that a terrorist group is planning an attack on oil tankers passing through the Malacca Strait, Bloomberg reported today. The warning did not name any terrorist groups, but the threat could be coming from a regional group with ties to al-Qaeda.

The Malacca Strait runs between Malaysia and the Indonesian island of Sumatra, and is the shortest sea route between the Persian Gulf and North Asia, says the EIA. According to EIA data, roughly 15 million barrels a day passed through the Malacca Strait in 2006, which accounts for nearly one-third of the global amount of oil shipped by sea. The IEA calls the Malacca Strait one of six “chokepoints” in sea routes around the world, similar to the Strait of Hormuz that leads out of the Persian Gulf, making it a critical point for global security, reports Reuters.

The navy’s advisory reported that “the terrorists’ intent is probably to achieve widespread publicity and showcase that it remains a viable group,” an indication that al-Qaeda may be involved in some way. Terrorism expert Rohan Gunaratna told Bloomberg of the possible al-Qaeda connection: “There are terrorist groups in the region that have the intent to carry out terrorist attacks and some of these groups have relationships with al-Qaeda.”

Al-Qaeda has previously targeted ships in terror attacks. The suicide bombing of the USS Cole in 2000 killed 17 American sailors, and a 2002 suicide bombing of the French supertanker Limburg spilled 90,000 barrels of oil into the Gulf of Aden. Oil tankers are considered “soft targets,” according to an analysis by Reuters, because the slow-moving ships can be attacked by smaller, more maneuverable vessels such as speedboats or fishing boats. Little wonder that Gunaratna, head of the International Center for Political Violence and Terrorism Research in Singapore, bellieves “the warning should be taken very seriously.”

So far oil markets have been unmoved by the threat, but that would surely change if an attack were attempted or successful. Markets have shown a consistent response to terrorist attacks, which includes sell-offs in many markets as investors’ appetite for risk collapses, and a turn to US Treasuries and some commodities (such as gold) as safe havens.

While any terrorist attempt could trigger this psychological response, an attack that disrupted a major shipping lane such as the Malacca Strait would have a more severe and longer-lasting impact on the global economy. If the Malacca Strait were rendered impassable—through an oil spill, for example—the supply chains for oil and many other goods would be upset, leading to higher prices that would ripple through the world economy.

Already this heating season, heating oil consumers have seen retail heating oil prices rise because of labor strikes in France, attacks on oil pipelines in Nigeria, and an attack on an oil tanker by Somali pirates, demonstrating how the price of oil is intertwined with world events. An attack in the Malacca Strait would likely raise home heating costs again, and perhaps have a financial impact that extends beyond oil markets. A terrorist attack would, of course, have other costs as well, because while the Somali pirates intended to capture the tanker and hold it ransom, terrorists affiliated with al-Qaeda may have no such intention, and instead aim for a dramatic act that achieves nothing but destruction.

Oil demand is improving. How much depends on one's beliefs about economic recovery. (image: newsx.com)

On Monday, Goldman Sachs and the London nonprofit Centre for Global Energy Studies released conflicting forecasts for 2010 oil prices.

According to Reuters, Goldman Sachs predicted crude oil prices would increase to the $85-95 range by the end of the year, citing positive growth in the US manufacturing sector and Japan. As reported by MarketNews.com, the Centre for Global Energy Studies (CGES) agreed that oil demand was improving but found insufficient evidence to tie this development to real growth and predicted prices would not rise above $80 or $90 a barrel.

Since October, oil has been selling in the $70-80 range. The CGES attributed a small increase in oil demand to ballooning Chinese consumption and a recent cold weather spell that has created more demand for heating oil in the Northern Hemisphere. However, the agency predicted these demand sources would diminish in strength for the rest of the year due to warmer weather predictions and a slowdown in China that would likely follow from the near-termination of the Chinese government’s massive stimulus package. The CGES report pointed out that Chinese crude oil imports have already fallen from 500,000 barrels per day in the first half of 2009 to 80,000 bpd in the last few months. Because real growth will require a recovery in exports, the report reasoned, a substantial demand contribution from China is dependent on a broader economic recovery from its trading partners.

Goldman Sachs pointed to data from the US industrial production sector that showed positive year-on-year growth in the first term of 2010 for the first time since the beginning of the recession. However, the trader neglected to comment on the rising unemployment and wage stagnation in developed countries. As previously reported on HeatingOil.com, the investment bank has cited a rapidly expanding Asian market and dwindling production in the world’s largest oilfields as reason to expect soaring 2010 oil prices.

In contrast, CGES found that a large oil surplus would force prices down in 2010, predicting a market addition of almost 1 million bpd of liquid oil products and liquid natural gas by the year’s end from OPEC and non-OPEC producers. The agency also noted that increased efforts to employ alternative energy or conserve, inspired by the price spike of 2008, will continue depressing demand for oil.

Crude oil prices over the course of today, February 15. (image: ft.com)

With markets closed in the US and much of Asia, Europe became the focus of most trading today. News of Japanese economic growth lifted oil prices this morning as investors saw in it a signal of increased global oil demand, but a meeting of European finance ministers brought attention to Greece’s fiscal crisis, which weakened the euro. As the dollar rose against the euro, commodities priced in dollars, like heating oil and crude oil, became more expensive to investors that held other currencies, and demand and prices slipped. While prices fell slightly, the change was small enough that it will likely not be felt in retail markets.

Today’s closing prices on NYMEX

Crude oil (March 2010 contract): Down 0.2 percent, $74.00 per barrel.
Heating oil (March 2010 contract): Down 0.2 percent.

Downtown Portland, ME, where mild weather has brought down heating oil prices. (image: hellomotor.files.wordpress.com)

Maine energy officials reported yesterday that the price of heating oil fell last week, marking the first price drop since early December. According to the Office of Energy Independence and Security, the average price of heating oil fell to $2.67 a gallon, about a penny per gallon less than last week.

No doubt Mainers have warmer weather to thank for the reduced oil prices. The past week has been noticeably mild—Portland enjoyed temperatures in the mid-30s yesterday—after a prolonged cold spell drove up heating-oil prices in early January. As usual, prices were lowest in southern Maine and highest in the northern regions of the state.

Those readers keeping score at home will recall that heating-oil prices in Maine have been steadily increasing for at least four weeks. Not long ago, the price for heating oil hit $2.77 a gallon, which Office of Energy Independence and Security Director John Kerry attributed to colder weather and an improving economy in Asia. As long as global economic conditions don’t cool precipitously, Mainers—like other heating oil customers in the Northeast—might expect prices to remain above $2.60 per gallon, no matter how warm the weather.

(image: mcburnieoil.com)

WGME 13 in Maine reported Tuesday that heating oil prices in the state rose for the fourth week in a row during the week ending January 8. According to The Governor’s Office of Energy Independence and Security, the average price for No. 2 heating oil is currently $2.77 per gallon, up 10 cents from the previous week. Director John Kerry attributed the ascent in prices to a strengthening economy in Asia.

An offshore rig of Kuwait Petroleum, which has cut prices in response to low oil demand in Asia. (image: kpc.com)

In Kuwait, at least, oil prices are reflecting classic economics: With lowered demand for oil, Kuwait cut its prices. Although that’s how we typically expect prices to work, that hasn’t been the case for oil prices in the US.

Bloomberg is reporting that Kuwait Petroleum Corp. reduced its official February selling price for crude oil to Asia. In the face of shrinking demand, the Kuwaiti company’s official February selling price was the lowest in five months.

Japanese and South Korean refiners have cut back on their processing in response to low oil demand, much the same way US refiners have tried to preserve some profit by closing some refineries and operating below capacity.

In the US, however low demand hasn’t necessarily meant lower prices. Oil prices climbed in 2009 despite paltry demand, supported by speculation and investment.

A winter storm and freezing temperatures have battered the Northeast. (image: burlingtonfreepress.com)

For market-watchers, today isn’t just the beginning of a new year, it’s the beginning of a new decade. And for those watching oil prices, things kicked into high gear quickly as oil futures hit $81 a barrel. As the Wall Street Journal reported, that figure marked a two-month high brought on by, among other factors, a holiday weekend that saw bone-chilling temperatures throughout much of the Northeast.

The cold—the low in New York City for today is expected to be 17 degrees and the forecast shows no signs of the chill letting up in the region—brought about a spike in heating oil prices this morning with light, sweet crude hitting a high of $81.68, marking a level that it had not reached since October 23.

That the chilly weather extends beyond the region—Europe and parts of Asia are also experiencing a major cold front and forecasts call for China to see some of its lowest temperatures in decades in the coming days—is only part of the reason oil prices kicked off 2010 with such a bang. Analysts pointed to both the continuing weakness of the dollar against the Euro, as well as the hopes that an economic recovery will boost consumption, as contributing factors to the high prices.

Growth in the manufacturing sector, both domestically and abroad, also contributed to rising oil prices. the US, the UK, and China all saw expansion in manufacturing in December.

Potential disruptions of Russia’s oil supply to Europe—which runs through Belarus—are affecting crude prices today, some analysts think. Russia continues to negotiate with Belarus over oil shipments for the year and could cut off oil shipments to Belarus. Phil Flynn, an analyst with PFG Best in New York, told the Journal that even a potential threat to oil supplies will tend to raise the market price of crude.

While investors hold different interpretations of what the first trading day of the new year portends for the financial future—and, in this case, what the first trading day of a new decade could mean for an even longer stretch—many have predicted that oil will be down this year. Despite crude’s short-term gains on today’s trading floor, a number of analysts and organizations have predicted that oil prices will drop, not rise, in 2010. Commerzbank AG’s Eugen Weinberg, for example, predicted crude would fall as low as the $50-range this year, and the Energy Information Agency also called for crude prices to drop in 2010.

Saudi Arabia’s oil minister, Ali Al-Naimi, called oil prices “perfect” but they may breed competition. (image: nytimes.com)

In the world according to OPEC, $75 is the magic number for a barrel of oil. According to Amy Myers Jaffe at the Houston Chronicle, OPEC’s thinking goes like this: seventy-five dollars is enough to maintain investments in difficult-to-reach oil such as deep water and tar sands oil, assures that oil producers can fund national budgets, and allows investors to profit. And since the global economy is currently recovering, albeit slowly, with $75 oil, OPEC figures that $75 is not that damaging to the recovery. American drivers are still driving with $75 oil, and Chinese drivers are buying cars.

But, Myers Jaffe says, this is wishful thinking. She says there are two reasons why $75 is, in fact, too high.

First off, this price is too high for a third of the world’s population. With oil at $75 a barrel, people in Africa, Latin America, and Asia can’t afford heat, lighting, or cooking fuel.

The second reason is that $75 is high enough that it will make investments in alternative energy affordable. By keeping oil prices at $75, OPEC could be helping its competition—not other nations that produce oil, but companies producing alternatives to oil.

While alternative energies would have great difficulty reaching a price point of $30 or $40 a barrel, at higher prices new energy-efficient technologies that can replace oil could flourish: shale gas, coal liquification, electric cars, and biofuels.

Assured that oil will not go below $75, companies can invest in renewable technologies and feel safe that they will be able to produce energy at a competitive price.

Oil companies will be spending more money on exploration in 2010. (image: yorku.ca)

A survey of 387 oil and gas producers found that global spending on oil and gas exploration will rise 11 percent to $439 billion in 2010 as energy prices increase, Reuters reported on Thursday. The increase in spending on exploration reverses the 15 percent decrease seen in 2009, when oil prices dropped after 2008’s record highs.

Exploration and development spending is strongly linked to oil and gas prices. If prices are too low, oil companies have no incentive to initiate exploration and drilling projects. Without the development and production of new fields, however, supplies will decrease; that could in turn raise prices, unless demand falls by an equal amount.

The survey projected spending on exploration and development in the US to rise by 12 percent to $79 billion, with drilling for shale gas responsible for much of the increase. Spending in Canada is expected to increase by 23 percent to $23 billion, buoyed in part by the strengthening of the Canadian dollar. Globally, national oil companies in Asia, Africa, the Middle East, and Russia are expected to increase their budgets and raise exploration and development spending outside of North America by 10 percent to reach $337 billion.

The findings of the survey, conducted by Barclay’s Capital, fit with Chevron’s recent decision to focus on exploration and development in favor of refining. The majority of Chevron’s $22 billion in planned spending for 2010—$17.6 billion—will be spent on upstream natural gas and crude oil exploration and production projects.

(image: telegraph.co.uk)

Week two of the Copenhagen Climate Summit began today, amidst reports of weekend protests, stalled negotiations, and a major player deciding to come two days early. There’s a lot to cover, but first, let’s take a look at some analysis that emerged over the weekend from the New York Times.

John M. Broder wrote on Saturday about the specific challenges President Obama faces as he makes his way to Copenhagen later this week. Although the House did pass a bill in June that includes Obama’s pledge to reduce emissions by 17 percent over the next decade, the Senate hasn’t even gotten around to debating the issue. And without Senate action, any promise Obama brings to the Copenhagen table is just that–a promise that may not be enough to persuade other nations to act.

As Republicans and Democrats in Congress refuse to accept legislation that threatens their constituents’ jobs and industries, the president finds himself heading into Copenhagen with his hands seemingly tied. While he could use the recent EPA ruling to regulate the country’s emissions, the president has made it clear he favors a “messy Congressional compromise.” Given all this political wrangling, there’s no doubt everyone is waiting to hear what he will bring to the table.

Meanwhile, in a Friday editorial, the Times highlighted the tough talk coming from China so far in Denmark, and the United State’s blunt responses. Todd Stern, the chief American negotiator, has made it painfully clear that there is no way to address the problem of climate change without the cooperation of China and other major developing nations.

Protests continued over the weekend, resulting in the arrest of over 900 activists. Tens of thousands of people took to the streets Saturday, some dressed as penguins and polar bears, carrying signs proclaiming “Save the humans.” The protesters are advocating a legally binding agreement in regards to climate change, and have been mostly peaceful. There were reports of a group throwing rocks at police, but there has also been talk of police overreaction in the face of largely peaceful demonstrations.

Two of the industrialized world’s major powers made moves today to show their commitment to the issue at hand. According to the UK Guardian, Gordon Brown, the UK prime minister, announced that he would fly to Copenhagen on Tuesday, two full days before he had originally planned. A spokesperson for the prime minister said that Brown believes negotiations cannot wait until the last minute, and wants high-level leaders involved as soon as possible. He is looking to leave the conference with a political, rather than a legally binding, agreement.

The second major statement came from the U.S., as Energy Secretary Steven Chu promised the conference a $350 million fund for the development of new clean energy technologies. In an appearance at the US pavilion in Copenhagen, Chu likened the pledge to the breakthrough of seed technology in Asia, saying, “We need a gamechanger like the green revolution was for agriculture.” The announcement was part of an attempt by the Obama administration to illustrate to the international community how serious the U.S. is about addressing climate change.

And lastly, the Economic Times reported Monday on the two-hour stall in negotiations after the African bloc accused developed countries of “killing the Kyoto protocol” and attempting to sideline poor nations. With China and India by their side, the African nations demanded a firm commitment from rich countries on their emissions targets. With this latest deadlock, hopes of reaching an all-encompassing agreement are fading.

As we kick off this second week, there is still a lot of work to be done. Probably most crucial, however, is the world’s response to whatever President Obama comes to the table with later this week.