Wary investors at the NYMEX kept the prices of crude and heating oil mostly flat on Friday. (image: Nicholas Whitaker for HeatingOil.com)

Oil prices failed to turn around on Friday after three straight days of losses precipitated by a parade of negative economic news last week. However, Friday’s losses to both crude and heating oil prices were small, with both commodities ending the trading day near their opening prices. As a result, today’s retail heating oil prices are largely unchanged from Friday. On the markets this morning, both crude and heating oil appear to be stalled near their closing positions from last week. The price of crude is hovering around the $75-per-barrel mark, supported by a weakening US dollar, but gains will likely be limited as the economic outlook in the US and elsewhere continues to look gloomy. Today, reports of a slowdown in Japan’s economic growth added downward pressure on oil prices, as Japan is the world’s third-largest oil consumer.

Today’s average retail heating oil price per gallon is unchanged from Friday’s average price.

Heating oil prices jumped as stock markets rallied. (image: Nicholas Whitaker for HeatingOil.com)

Oil prices surged again on Tuesday as the price of crude oil hit a one-month high and the price of crude oil and heating oil appear poised to make big gains this week. Europe’s debt crisis has depressed oil prices for weeks, but investors have regained optimism about global economic recovery. Stock markets in Asia, Europe, and the US advanced on Tuesday, which pointed to economic growth that would in turn ramp up oil demand. Weakness in the dollar also pushed oil prices higher. Crude oil and heating oil futures are priced in dollars, so a weak dollar makes them cheaper for traders who hold other currencies.

Today’s average retail heating oil price in the Northeast is 4 cents higher than Tuesday’s average price.

Crude oil prices over the course of today, April 6. (image: ft.com)

Crude oil and heating prices inched up on Tuesday as signs of global economic recovery continued to support higher prices. Last Friday’s payroll report showed that the US economy added jobs, and in the past week reports from Europe, Asia, and the US showed growth in manufacturing activity. Economic signs overcome the effect of the dollar’s strength, which tends to depress oil prices. Crude oil and heating oil futures are priced in dollars, so a strong dollar makes them more expensive for traders who hold other currencies. Traders now look ahead to weekly inventory data, especially Wednesday morning’s report from the EIA, to gauge oil demand in the US.

Today’s closing prices on NYMEX

Crude oil (May 2010 contract): Up 0.2 percent, $86.82 per barrel.
Heating oil (May 2010 contract): Up 0.1 percent.

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.