By Duncan Sutherland- Exclusive to Crude Investing News

After four weeks of refreshing slippage, NYMEX oil futures began to edge upward into the $120 per barrel range. It appears the rise was largely predicated on two factors.

First, Wednesday saw a fire that damaged a section of the BP (NYSE:BP) operated Baku-Tbilisi-Ceyhan pipeline, forcing a temporary shutdown for repairs. The pipeline ships 850,000 barrels per day from the Caspian to the Mediterranean seas.

Second, it appeared that a fresh round of United Nations sanctions might be imposed upon the Islamic Republic of Iran. The last sanctions, established in United Nations Security Council resolution 1737 and supplemented by resolutions 1747 and 1803, have not convinced the country to abandon its uranium enrichment activities. Accordingly, the US administration is attempting to orchestrate more stringent restrictions on trade. Although France and Britain appear to agree, convincing Russia and China will be considerably more difficult. Regardless, the mutual distrust between Iran and oil consuming nations will continue to act as a support to high barrel prices.

Any facade of a coherent OPEC output target continues to disintegrate as member countries pursue divergent production policies. Saudi Arabia temporarily increased supply has been rescinded, reducing OPEC shipments by 1.5%. Meanwhile, Abu Dhabi (one of the UAE’s seven Emirates) has outlined a plan to invest $20 billion in the sector to boost oil production.

Although Iraq is not included in OPEC production quotas, its energy sector has seen a spate of good news lately. New numbers indicate that Iraqi revenues for oil exports in the January-July period of 2008 amounted to more than $43 billion. Iraq is also planning to expand its As Samawah oil refinery, awarding the contract to Colorado Industrial Construction Services Co. and CH2M Hill subsidiary VECO (of Ted Stevens fame). It has not been confirmed yet whether the deal involves renovations and new stoves for the Iraqi Cabinet.

Separately, the US Government Accountability Office has issued a new report, Stabilizing and Rebuilding Iraq: Iraqi Revenues, Expenditure, and Surplus that estimates the government of Iraq has collected $96 billion in oil revenues since 2005. Given the logistical difficulties of spending the money, this boon has resulted in a significant surplus for the Iraqi government.

Elsewhere, Nigerian Oil minister Odein Ajumogobia declared that pipeline repairs had been completed after the July 28 MEND attacks. This coincided with pipeline operator Shell (NYSE:RDS.A) noting that repairs were continuing. All due respect to Mr. Ajumogobia, but I am inclined to trust Shell on this one.

Tullow Oil (LSE:TLW) continues to receive good news. The mid-sized explorer has recently had a spate of agreeable drilling results from its Africa properties, including yesterday’s announcement that an exploration well in “the Butiaba region of Uganda Block 2, has encountered over 31 metres of net oil pay and at least 6 metres of net gas pay”. Chief Executive Aidan Heavey noted the company’s “100% exploration success record in Uganda”. Tullow has repeatedly been mentioned in this space, always with positive news. Pursuant to this, I would upgrade Tullow from one to watch to buy.

The conclusion seems inescapable that barrel prices are overvalued. The combination of new Iran sanctions and the pipeline fire in Turkey pushed futures up only a paltry amount. Had these two incidents occurred in the spring of this year, the rise would have been much more dramatic. It seems that the bears have won the day. Though the settling price is difficult to predict, oil’s bull market is certainly tottering, and toreros have guided it into el tercio de muerte. Expect further weakening of the price, with support in the $110-$112 band.

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