$100 Oil for 2018 Reflects Threat From BP Spill

Crude oil futures for delivery in 2018 surged above $100 a barrel this week as the BP Plc oil spill in the Gulf of Mexico led the government to consider a halt in future drilling.

The oil contract dated furthest into the future jumped after President Barack Obama said no new offshore drilling leases should be issued until a “thorough review” of the April 20 rig explosion. The leak is pouring an estimated 5,000 barrels a day into the Gulf.

“By 2016 to 2018, there could be some significant impact on the supply standpoint,” according to Antoine Halff, head of energy research at Newedge USA LLC in New York, adding that a moratorium on new drilling, his worst-case scenario, would cause a shortfall of 500,000 to 1 million barrels a day. “They wouldn’t be able to offset depletion with new drilling.”

Crude oil for delivery in December 2018 rose to $100.38 a barrel May 3 on the New York Mercantile Exchange, the highest settlement since Jan. 20. The price has climbed 11 percent in the past five weeks, compared with a 3.4 percent gain in the June 2010 contract. The 2018 futures lost $1.47, or 1.5 percent, to $97.97 today as the price for delivery next month declined 3.3 percent to $79.97.

Open interest in December $100 calls, bets that prices will breach that level, exceeded 79,000 contracts yesterday, making it the most widely held option.

‘Death Knell’

Existing operations won’t be affected by Obama’s order, and there are no pending lease sales in the next 30 days, Robert Gibbs, the White House press secretary, said April 30. Obama won’t rule out a reversal of his March 31 decision to expand offshore oil exploration, Gibbs said yesterday.

“I continue to believe that the domestic oil production is an important part” of U.S. energy policy, Obama said April 30. “But I’ve always said it must be done responsibly, for the safety of our workers and our environment.”

The leak is the “death knell” for efforts to expand offshore drilling and may kill the chances for U.S. climate change legislation this year, said Michael Morris, chief executive officer of Columbus, Ohio-based American Electric Power Co., the biggest U.S. producer of electricity from coal. He spoke in an interview yesterday at Bloomberg’s New York headquarters.

‘Will Pay Tomorrow’

“You may not pay today, but we will pay tomorrow,” Phil Flynn, vice president of research at PFGBest in Chicago, said in a report.

In other energy markets, Brent for December 2018 delivery settled below $100 for the first time since April 29, falling $1.24, or 1.2 percent, to $99.13 a barrel on the London-based ICE Futures Europe Exchange today. That’s $1.16 more than the Nymex contract.

Nymex futures first reached $100 on Jan. 2, 2008, on their way to a record $147.27 a barrel six months later. They plunged to $32.40 in December 2008 as the global recession worsened.

“That $100 oil equates to pretty close to $4 a gallon gasoline” in the U.S., said Bruce Bullock, director of the Maguire Energy Institute at Southern Methodist University in Dallas. “We know when it hit $3 a gallon two years ago drivers started to get concerned, and at $4 a gallon demand evaporated.”

Cushing Supplies

Near-record supplies at Cushing, Oklahoma, the delivery point for New York-traded futures, have narrowed the difference between U.S. crude and Brent, Europe’s benchmark.

Cushing inventories are also pressuring short-term Nymex contracts. June 2010 oil was $16.70 cheaper than December 2018 crude yesterday, the widest spread between the two since Feb. 18.

Long-term oil prices also rose as traders bet that an economic rebound will spur demand over years rather than months.

“The move toward longer-dated contracts comes as markets say, ‘This bet on the economy is still good, but the payout time is still further out into the future,’” said David Kirsch, the Kansas City, Kansas-based director of oil markets at consultant PFC Energy.

The U.S. economy expanded at a 3.2 percent rate in the first three months of the year, capping the biggest six-month gain since 2003, figures from the Commerce Department showed last week in Washington. It grew at a 5.6 percent rate in the fourth quarter.

Global oil demand is forecast to increase 2 percent this year amid growth in emerging markets, stemming two years of declines, according to the International Energy Agency in Paris.

The economy, a strengthening equities market and forecasts for a seasonal increase in U.S. fuel demand have driven near- term prices to their highest level since October 2008.

To contact the reporter on this story: Margot Habiby in Dallas at mhabiby@bloomberg.net.

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