- The Washington Times - Friday, March 20, 2009

VIENNA (AP) - Oil prices reversed course and traded higher Friday on news that two U.S. Navy vessels had collided in the Strait of Hormuz, the portal for about 40 percent of all seaborne traded oil last year.

A submarine and an amphibious ship collided early Friday in the Strait of Hormuz between Iran and the Arabian peninsula, the U.S. Navy’s 5th Fleet reported.

Benchmark crude for April delivery, which had traded lower for most of the morning, erased those losses and rose 39 cents to $52 on the New York Mercantile Exchange.

The USS Hartford, a submarine, collided with an amphibious ship, the USS New Orleans. Both were operating under their own power.

The Navy said the ships were conducting regular security operations. According to the Bahrain-based 5th Fleet, 15 soldiers aboard the Hartford were slightly injured but able to return to duty.

The New Orleans suffered a ruptured fuel tank, resulting in an oil spill of approximately 25,000 gallons of diesel fuel.

Oil prices rallied this week with a growing consensus that OPEC has cut production substantially.

In a report Friday, analysts with Morgan Stanley said a sharp drop-off in deep water drilling projects could cut crude supplies by another 2.4 million barrels a day in 2011.

That would come on top of 4.2 million barrels a day that OPEC has promised to cut.

With the April contract set to expire Friday, most of the trading had shifted to the contract for May, which rose 29 cents to $53.33.

Traders, however, said the economic downturn was keeping prices in check.

An incident like a collision in the Strait of Hormuz would likely have sent prices skyrocketing just seven months ago.

“One significant bad figure and the whole thing can collapse, so it’s really fragile,” said Christoffer Moltke-Leth, head of sales trading for Saxo Capital Markets in Singapore.

Oil has been bolstered this week by news the U.S. Federal Reserve plans to buy $1.25 trillion of government bonds and mortgage-backed securities. The announcement sent the dollar down on worries the plan would expand dramatically the money supply and stoke inflation. Oil contracts are often used by investors as a hedge against inflation and a weakening dollar.

“Oil is still strongly correlated to the dollar,” Moltke-Leth. “What the Fed is doing _ printing money to buy government debt _ it’s just the most inflationary thing you can do.”

The dollar was steady at 94.58 yen Friday, but that was down from nearly 99 yen just two days ago. The euro was trading at $1.3649.

OPEC has also helped boost prices by largely complying with 4.2 million barrels a day of production cuts the group has announced since September. The Organization of the Petroleum Exporting Countries decided not to reduce output quotas at a meeting on Sunday, but instead focus on adhering to the existing cuts.

Analysts estimate OPEC has so far fulfilled about 80 percent of the promised cuts.

“They won a bit of credibility by saying they have to stick to their quotas and be disciplined,” Moltke-Leth said.

Vienna’s JBC Energy forecast future upward pressure, despite Friday’s downward move.

“OPEC cuts, declining volumes in floating storage, refiners preparing for the summer driving season as well as … mentioned inflationary concerns should all contribute to this development,” it said in its daily report.

In other Nymex trading, gasoline for April delivery rose less than a penny to $1.4456 a gallon, while heating oil rose 1.5 cents to $1.3715 a gallon. Natural gas for April delivery rose 13 cents to $4.30 per 1,000 cubic feet.

In London, Brent prices rose 50 cents to $51.17 on the ICE Futures exchange.

___

Associated Press writer Alex Kennedy contributed to this report from Singapore.

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