08/11/2008 - Updated 3:46 PM ET
Oil ends below $115 a barrelTraders weigh potential supply disruptions against demand slowdown
By Polya Lesova, MarketWatch & Myra P. Saefong, MarketWatch
SAN FRANCISCO (MarketWatch) -- Crude-oil futures closed below $115 a barrel Monday after touching their lowest level in more than three months, as traders weighed the potential for energy supply disruptions related to the military conflict between Georgia and Russia against ongoing concerns over a slowdown in global oil demand.
"The drop-off in U.S. consumption and increase in inventories will offset anything going on in the former Soviet bloc," said Anthony Sabino, a professor of law at St. John's University, whose legal practice includes oil and gas law. "That more than anything will hold prices down."
Crude for September delivery fell 75 cents to close at $114.45 a barrel on the New York Mercantile Exchange.
It touched a low of $112.72 in electronic trading on Globex, the lowest intraday price since May 1 -- but it also rose as high as $116.
Traders attributed the earlier price gain to the dispute centered on the breakaway region of South Ossetia along the border of Russia and the former Soviet republic of Georgia.
"Conflict between Russia and Georgia has been supportive of oil prices, as the hostilities threaten oil exports from the Caspian region," said analysts at Action Economics.
But "concern over contracting demand, the result of a slowing global economy, has motivated sellers," according to a note to clients from Michael Fitzpatrick, an analyst at MF Global.
On Friday, benchmark crude dropped $4.82 to close at $115.20 a barrel on the New York Mercantile Exchange, putting its weekly loss at $9.90.
Azerbaijan has stopped oil exports via the Georgian ports of Batumi and Kulevi because of the conflict with Russia over South Ossetia, AFP reported over the weekend, citing the head of the Azeri state oil company SOCAR.
Rovnag Abdullayev, the head of SOCAR, also said Saturday that the company was "looking into the possibility of exporting oil through the Baku-Novorossiysk pipeline, but the capacity of this pipeline is quite low," AFP reported. 'The drop off in U.S. consumption and increase in inventories will offset anything going on in the former Soviet bloc.'
Anthony Sabino, St. John's University
But on Monday, SOCAR said that Azerbaijan continues to export oil through Georgia, Dow Jones Newswires reported. An unnamed, high-ranking SOCAR official told Dow Jones Newswires on Monday that "despite the tense situation between Georgia and Russia, we continue to send oil through Georgia via the Baku-Supsa pipeline and by rail to the Batumi oil terminal."
The military conflict broke out Friday, and over the weekend, hostilities escalated amid reports of Russian attacks against towns located inside Georgia.
Mikhail Saakashvili, the president of Georgia, supported a draft European Union proposal for a ceasefire, but Russia reportedly rejected the plan, the BBC reported Monday.
Georgia is a key transport route for oil and gas from the Caucasus and Central Asia to Western Europe.
Also Monday, oil major BP PLC [
BP] said that a fire on the Turkish section of the Baku-Tbilisi-Ceyhan oil pipeline has now been extinguished and that the alternative routes it uses continue to operate in spite of the hostilities involving Russia and Georgia, Dow Jones Newswires reported.
A fire last Wednesday shut down the pipeline, which transports about a million barrels a day of Azeri oil to the West.
Geography lesson
In regard to the conflict in Georgia, "the strategic consequences far outweigh the short-term implications for oil prices," said James Williams, an economist at WTRG Economics.
"While South Ossetia has generally fallen into the Russian sphere of influence and there is a certain logic to the Russian invasion of Ossetia, it appears that the Russians are not satisfied with that conquest and have recently taken Gori to the southeast of Tskhinvali the capital of South Ossetia," he said in emailed comments.
"That means they have covered about 40% of the distance between Tskhinvali and the Georgian capita Tbilisi," he explained. "This is undisputed Georgian territory and the strongest indicator yet that Russia may intend to occupy all of Georgia."
Williams also points out that the Baku-Tbilisi-Ceyhan pipeline, which was built to allow exports from Azerbaijan's Azeri-Chirag-Guneshli oil field in the Caspian Sea as well as oil from Kazakhstan's Kashagan oil field and other oil fields in Central Asia, runs along the southern border of Georgia.
"If they take the entire country, Russia will have a stranglehold on Caspian exports to Europe," Williams said.
Even so, in the face of this, oil prices are lower, he said. "Two months ago this would have cause a $5 to $10 increase in prices over a two- to three-day period," he said. "Instead prices are down again. There can be no clearer sign that we have entered a bear market for crude oil."
Breather?
For this week, the oil market "may decide to take a breather," said Darin Newsom, a senior analyst at DTN.
"The spot-month September contract has come back to important support near $115 and has unearthed renewed commercial buying," but some wonder whether it will be enough to hold the market at this level, he said in emailed comments.
"Possibly, but if it falters, the market could ultimately trade back to near $98.60."
It is unlikely that gasoline demand has increased much, "but the sharp decline in average U.S. price makes it a possibility," Newsom said in emailed comments.
The average U.S. price for a gallon of regular gasoline stood at $3.81 Monday, down from $4.098 a month ago, according to AAA's Daily Fuel Gauge Report.
On Nymex, September reformulated gasoline closed down 2.1 cents at $2.8666 a gallon, while September heating oil shed 0.9 cent to end at $3.1195 a gallon.
Natural gas was the lone gainer among the energy futures, with natural gas for September delivery up 10.1 cents to finish at $8.349 per million British thermal units.
The Reuters/Jefferies CRB Index [
CRB] , a benchmark gauging the prices of major commodities, fell 0.6%.
