Crude Oil Rises on Excessive Drop, Supply Threat in Caspian Sea

By Nesa Subrahmaniyan

Aug. 11 (Bloomberg) -- Crude oil rose from a 14-week low in New York as traders deemed last week's 7.9 percent drop excessive and the Russia-Georgia conflict raised concern that Caspian Sea supplies may be disrupted.

Russian bombers targeted the Baku-Tbilisi-Ceyhan pipeline supplying Azeri crude across Georgia and Turkey to the Mediterranean Sea, Georgian Economy Minister Eka Sharashidze said yesterday. Georgia is a key link in a U.S.-backed ``southern energy corridor'' that connects the Caspian Sea region with world markets, bypassing Russia.

``It's mainly a technical rebound after last week's big drop coupled with concern about supplies from the Caspian,'' said Tetsu Emori, a fund manager at Astmax Co. in Tokyo. ``Prices may test $117 before another wave of selling.''

Crude oil for September delivery gained as much as $1.54, or 1.3 percent, to $116.74 a barrel in electronic trading on the New York Mercantile Exchange, and traded at $116.38 at 12:46 p.m. in Singapore. Oil settled at $115.20 on Aug. 8, the lowest close since May 1.

Futures have fallen 21 percent from the record $147.27 a barrel reached on July 11.

Brent crude for September settlement rose as much as $1.47, or 1.3 percent, to $114.80 on the ICE Futures Europe exchange, and traded at $114.70 at 12:37 p.m. Singapore time.

Nymex crude traded at a premium of $1.68 a barrel to Brent crude oil, compared with 59 cents a month earlier.

``Whether we get an actual physical disruption in supply to Europe, that will be the critical thing,'' said Gerard Burg, energy and minerals economist at National Australia Bank Ltd. in Melbourne. ``If it impacts on Brent, it is going to affect a much wider market and has the potential to send prices higher.''

Baku Pipelines

The Baku-Tbilisi-Ceyhan pipeline ships Azeri Light crude, which is typically priced based on the Brent contract.

Russian troops entered the breakaway province of South Ossetia on Aug. 8 after fighting between local forces and the Georgian army. Georgia, which has withdrawn its forces, is now under attack from warplanes and artillery fire from neighboring Abkhazia province.

``Brent hasn't really narrowed to Nymex futures so it hasn't really affected supplies too much, but if there's a real prolonged disruption, then Brent may get a kick up,'' Astmax's Emori said. ``The European refinery maintenance season is also about to start so demand for crude may also drop.''

Uninterrupted Operations

BP Plc, Europe's second-largest oil company by market value, said its operations and production continue as they were on Aug. 8, amid fighting between Russian and Georgian troops in the region of South Ossetia, spokeswoman Tamam Bayatly said.

``Supplies haven't really been affected though there's a geopolitical risk premium potentially being priced in,'' said Toby Hassall, analyst at Commodity Warrants Australia in Sydney. ``It's a technical bounce up today but doubts remain if it can be sustained.''

BP and other companies are pumping crude through the Baku- Supsa pipeline to the Georgian Black Sea coast, after a fire on Aug. 5 in Turkey stopped flows on the Baku-Tbilisi-Ceyhan oil pipeline, which runs about 100 kilometers (60 miles) south of the South Ossetian capital, Tskhinvali.

The Baku-Tblisi-Ceyhan pipeline was shut Aug. 5 after a blast on part of the line in eastern Turkey. The pipeline had been delivering about 800,000 barrels of oil a day to the Turkish port of Ceyhan before the shutdown, BP said last week.

The amount represents about 6 percent of the 12.8 million barrels a day produced by the countries of the former Soviet Union, according to data from the BP Statistical Review of Energy.

Dollar Gains

Unless supplies are stopped or the conflict escalates, oil prices may come under pressure from the rising U.S. dollar and a more ``bearish mood'' toward most commodities, National Australia's Burg said.

New York oil futures fell 4 percent to settle at $115.20 on Aug. 8, as gains in the dollar reduced the investment appeal of commodities. Gold, copper and grains also fell as weaker growth prospects in Europe reduced the likelihood of rate increases there and delivered the dollar its biggest gain against the euro since September, 2001.

The euro slumped to a five-month low against the dollar today, and traded at $1.4986 at 1:02 p.m. in Tokyo, from $1.5005 late Aug. 8 in New York.

New York oil futures traded as low as $114.62 on Aug. 8, dropping below the $116.76 level that marks a 50 percent retracement of the climb in prices from February to July's record $147.27 a barrel. Some traders use the Fibonacci analysis to suggest prices that may encourage investors to buy or sell a commodity.

``It fell very heavily,'' Burg said. ``You can often see a little bit of a rebound in those situations.''

To contact the reporter on this story: Nesa Subrahmaniyan in Singapore at nesas@bloomberg.net