Traders alarmed by intense pressure on the world's middle distillates markets

China (Platts) -- July 7 - 11, 2008

By reporters at Platts, the energy information division of the McGraw-Hill Companies. For more information about Platts' information products in China, contact Platts at china@platts.com, or call its representative office in Guangzhou at (+86) 20 2881 6588.

The threat of war between Iran and either Israel or the US was grabbing all the headlines last week, and understandably so, but oil traders seemed more immediately alarmed by intense pressure on the world's middle distillates markets and a possible new source of instability -- of all countries, Brazil.

The last thing that consumers need is a new source of tension among the world's oil exporters.

But that is exactly what they got last week, when news of a possible five-day Brazilian oil workers' strike shook the markets.

Spectacularly, even by this decade's standards, crude oil futures rallied by more than $10 in 24 hours as the week came to a close.

Light sweet crude oil futures hit a new record of $147.27 per barrel on the New York Mercantile Exchange and $147.50 on ICE Futures in London on Friday, before settling the day about $2 lower.

Brazil, a top oil producer with more than 2 million barrels per day of production, is particularly important to US oil imports since it represents "short-haul" imports from Latin America into the US that generally only take about six days.

Workers for Brazil's state-led Petrobras are to start a five-day strike on July 14.

The main union covering Petrobras workers in the key Campos Basin offshore southeastern Brazil confirmed to AFP that the near-total stoppage would occur.

"There will be minimal production if Petrobras accepts that the production is controlled by the workers," union spokesman Marcos Brida said. "But if the company tries to use its own teams, we will disconnect the equipment."

The employees on the 42 Petrobras oil platforms in the Campos zone are demanding an extra day off in their contracts. Currently, they work 14 days straight then get 21 days of rest.

The union also wants the company to count as a working day the day the workers travel back to the mainland.

The Campos area accounts for 80% of Petrobras' daily production of 1.8 million barrels of oil.

Stunning reversal as week comes to an end

Crude prices were also rocked by rumors surrounding the ongoing face-off between Iran and Western nations regarding its ongoing uranium enrichment program.

Rumors swirled that Israel was conducting air exercises using US military bases in Iraq. The US, Israel and Iraq subsequently denied these.

"We saw a stunning upside reversal yesterday, as the market's refusal to go down led to fresh, pent-up buying that set in instead," Ed Meir, energy analyst at MF Global, said in a report issued following early gains in trading on CME's Globex system.

"The magnitude of the advance of almost $12 per barrel from yesterday's lows to today's highs is indicative of a market in which current supply/usage balances are leaving no margin for error with regard to a possible significant supply disruption," energy consultant Jim Ritterbusch said in a report.

"Hence, the frenzied price response to the rumors of Israeli military maneuvers over Iraq and the recent missile testing by Iran," Ritterbusch said. "Add in the completion of the two-week ceasefire by the MEND organization in Nigeria and some labor unrest in Brazil within the oil worker's unions and the ingredients were in place for a one day 11% oil price spike that was unimaginable a year ago."

The Movement for the Emancipation of the Niger Delta (MEND) said July 10 that it would resume attacks in the country's oil-rich Niger Delta because of the UK's recent pledge to back the government in the long-simmering conflict there.

Updated: July 14, 2008

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