Once Seen As Elusive, $70 Crude Looks Increasingly Likely

NEW YORK (Dow Jones)

Crude oil futures have their eye on the $70 mark again.

Benchmark futures in New York set a fresh nine and half month high of more than $69 a barrel Tuesday but fell back after failing to take out the psychologically significant $70.00 a barrel mark. But a breach, which has proved elusive all year, now looks increasingly within reach, as traders face fresh supply worries, from tight gasoline supplies at the start of the U.S. summer peak driving season to renewed violence in oil-rich Nigeria.

The latest supply threat comes from Africa's largest oil producer, where more than 20% of the country's daily production remains hampered by militant attacks and where workers are threatening to strike. Brazil, a minor oil exporter, is facing an oil worker strike of its own.

"At this point, a festive breeze could get us to $70.00," said Tim Evans, an energy analyst at Citigroup in New York, noting that liquidity in the nearby crude contract has all but dried up ahead of expiration on Wednesday.

The nearby crude oil contract for July delivery on the New York Mercantile Exchange jumped as high as $69.56 a barrel, the highest level for a front-month contract since last September, before ending largely unchanged at $69.10 a barrel, up one cent.

The front-month contract has surged more than 8% so far this month. Crude for delivery in September and beyond all ended above $70.00 a barrel, while the August contract got as high as $69.97.

The seed of the rally was sown last week after the U.S. Energy Information Administration reported that U.S. refinery utilization, or the amount of refining capacity in use, unexpectedly fell for the week ended June 8, while gasoline stocks remained unchanged.

That put an end to three weeks of decline in oil prices and shifted the spotlight to tight U.S. petroleum product supplies. Once again, traders remain focused on weekly EIA data, due out Wednesday morning, with the outcome likely to determine whether crude prices can breach $70.00 a barrel.

Philip Gotthelf, president of brokerage Equidex in Closter, N.J., said a further drop in refinery utilization and gasoline stocks could lift prices well above $70.00 a barrel.

"With a very bullish report coming on the heels of Middle East tensions, people are going to want to hedge their position," Gotthelf said.

On the other hand, an increase in refinery use and a build in petroleum product stocks could push prices back towards the mid-$60.00's, he said.

Possibly Targeting $75

High oil prices in recent months have come against a backdrop of continued production restraints by the Organization of Petroleum Exporting Countries, adopted late last year and early this year. However, if prices continue to rise, analysts believe OPEC may be more inclined to relax the output cuts, both to appease political outcry in large consuming nations and protect oil demand.

"It's not in OPEC's best interest to allow the price of oil to go markedly above $75, even though there are predictions for $80, $90 and $100 oil," said Gotthelf.

Fadel Gheit, an analyst at Oppenheimer & Co., a New York brokerage firm, agreed that prices remain susceptible to spikes, both up and down, amid supply uncertainty.

"We could see $75.00 a barrel or we could see $65.00 a barrel in a few weeks, depending on what the summer is going to look like," Gheit said.

While crude oil supplies remain adequate - U.S. stocks are above their year-ago and five-year average levels - low petroleum product inventories and instability in oil-producing nations are keeping traders on their toes.

"The same unknowns are still in play: what happens in Venezuela? What happens in Nigeria," Gheit said.

Another big unknown is the Atlantic hurricane season, which is forecast to be unusually active this year, with seven to 10 hurricanes and three to five major hurricanes expected. While predictions of an above-average season fell flat last year, traders nonetheless remain jittery at the start of the season.

"The only reason people are claiming $70 is a possibility is because they're excited about predictions for more unsettled weather in the Gulf," Gotthelf said.

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