Traders say RI Minas oil prices can slump further

Traders say RI Minas oil prices can slump further

SINGAPORE (Reuter): Prices for Indonesia's benchmark Minas crude oil have slumped in recent weeks but could still fall further, traders said yesterday.

August liftings of the crude have traded at wider than a 20- cent discount to the Indonesian contract price (ICP) -- the price base -- as major buyers China and Japan stood back from the market.

Just one month ago Minas was trading at around a 40-cent premium but traders said that with one million barrels of Minas still on the shelf for August sales, prices could fall further.

"They could come down further because many producers have to sell soon," one trader said, referring to the buyers who have arranged lifting dates.

"There is already talk that a deal has been done at a US$1.00 discount, but it remains a rumor at this stage," another trader said.

China has traditionally bought as much as 1.5 million barrels of Minas crude a month but so far the buyer has not bought any August Minas, a trader said.

Market sources said China has stood back from the crude market in general with the intention of importing more oil products in August while encouraging national refineries to run domestically produced crudes.

"So far, they have not appeared in the market aggressively yet," one trader said.

At the same time, China prefers a maximum delivered price for Minas of $19.00 per barrel, market sources said. The crude was priced Monday at $19.20 per barrel fob Indonesia.

That does not mean China would not buy above $19.00, but it is feeling the pinch as the price of Minas has been expensive for several months as far as China is concerned, one trader said.

Traders said Japanese utilities did not step up their demand for Minas as a fuel for direct burning in power generators, which disappointed some market players.

During the summer months, when electricity demand often hits record levels, swing demand for Minas crude can be 100,000 barrels per day.

Japanese electricity demand, spurred by air conditioning use, hit record levels in July but temperatures have somewhat cooled in August.

Weather Service Corp of the U.S., a private forecaster, said it expected near normal weather in Japan for the next 10 days. But traders also noted that most of the lifting dates for August Minas were in the second half of the month which meant buyers could afford to stand back and wait.

One producer said he valued the Minas differential around par, despite recent deals, and forecast Minas sales would start moving soon.

"It's just been a slow period," he said. "We still expect Japanese utilities to come in. There's been a lot of sniffing about. Once it starts to move it will make a big difference," he said.

And Monday's crude rally on the New York Mercantile Exchange has sparked some interest to see if there was an arbitrage opportunity to trade Minas into the U.S. west coast. Front-month September crude futures rallied 65 cents to $22.22 per barrel on Monday -- $3 above the outright Minas price.

In London, oil prices dipped in early trade yesterday but held on to most of the sharp gains posted in Monday's dizzying rally as the market continues to defy analysts' predictions for a price fall.

London futures for benchmark North Sea Brent Blend crude oil for September delivery stood at $20.57 at 1010 GMT, down nine cents from the close of Monday which was a three-month high.

"The market's strength tends to worry us. Right now this market looks very strong," said Peter Gignoux, head of the London energy desk at Smith, Barney.

Analysts are especially baffled by the market's resilience to record high oil supply and the imminent appearance of the first Iraqi oil exports in more than six years.

Under United Nations sanctions since its 1990 invasion of Kuwait, Iraq is now just weeks away from exporting crude under a UN deal signed on May 20 allowing it to sell $2 billion worth of oil over six months to buy food and medicine.

But the delay in implementing the plan has led nervous traders to cover oversold positions they had built in expectation of the additional supplies of about 700,000 barrels per day (bpd).

"We are strong now because the Iraqi oil is not there yet. Even when it does come back it will not be before the first couple of cargoes hit the market before we see the price impact," said Bo Van Wijk, vice president of energy risk management services at Swiss bank UBS.