Market watch: NYMEX energy prices fall prior to OPEC production hike

Sam Fletcher
OGJ Senior Writer

HOUSTON, Jan. 13 -- Energy futures prices fell Friday on the New York Mercantile exchange as traders correctly anticipated that ministers of the Organization of Petroleum Exporting Countries would agree over the weekend to raise their collective oil export quota by 1.5 million b/d to 24.5 million b/d, effective Feb. 1.

That agreement came little more than a month after OPEC ministers' last meeting in Vienna, at which they agreed to hike their total official production quota by 1.3 million b/d in January if "cheating" members would reduce their overproduction back to that cumulative level (OGJ Online, Dec. 12, 2002). Analysts estimated at that time that the 10 active OPEC members were overproducing 2.5 million b/d above their then-quota of 21.7 million b/d, or 24.2 million b/d total. Futures market traders at that time generally viewed OPEC's overproduction as a signal that the cartel was losing its former discipline to a possible battle for market shares. But several economic analysts recognized it as an effort by OPEC to offset earlier cutbacks in Iraq's oil exports under the United Nations' oil-for-aide program.

At any rate, OPEC's new production quota represents an actual increase of only 200,000 b/d above the group's recent de facto production level. Moreover, the breakout of new production quotas among member countries includes an increase of 173,000 b/d in Venezuela's authorized production to 2.8 million b/d.

Venezuela's problems
It was the recent drop in Venezuela's crude production to less than 200,000 b/d from nearly 3 million b/d previously—the result of a general strike, now heading into its seventh week, aimed at ousting Venezuela President Hugo Chávez—that triggered the market crisis and escalating oil prices leading to Sunday's emergency meeting of OPEC ministers.

Venezuelan government officials claim they will increase that country's oil production to 1.5 million b/d by late January and return to full production of 3 million b/d in the first half of February. However, those claims are generally disputed by outside observers. Dow Jones reported Friday that government workers resumed production from 25 wells in southeast Venezuela that earlier were shut in by the strike and expected to increase that number to 100 this week.

Former top executives of Petroleos de Venezuela SA (PDVSA) claim it would take 4 months to get the state oil company back to full production if experienced workers retain their positions. However, Chávez said Saturday at a political rally in Caracas that 2,000 PDVSA employees have been fired in a move to "purify" the company. Former PDVSA officials claim 90% of the company's employees are participating in the strike to prevent Chávez from loading the firm's management with political employees (OGJ Online, Jan. 10. 2003).

Meanwhile, exports of Venezuelan oil and petroleum products are limited primarily to eight government-owned tankers that each ship little more than 1 million bbl/month. Prior to the strike, Venezuela exported more than 2 million b/d, primarily heavy oil to US refineries. However, international shippers are refusing to load from Venezuelan terminals because unlicensed government replacements for striking harbor pilots and tugboat captains violate insurance requirements.

Saudi Arabia and Iran get the biggest production increases under the new quotas, up 488,000 b/d and 220,000 b/d, respectively. Since oil shipments from the Middle East take several weeks longer to arrive at US markets than shorter shipments from Venezuela, Robert Morris at Salomon Smith Barney Inc., reported Monday, "A critical aspect of this boost in output is that the increased volumes likely won't reach the US until near the middle of March."

Futures prices
On Friday, the February contract for benchmark US light, sweet crudes declined by 31¢ to $31.68/bbl on NYMEX, while the March position retreated by 32¢ to $30.96/bbl. Unleaded gasoline for February delivery plunged 2.06¢ to 87.19¢/gal. Heating oil for the same month dropped 0.97¢ to 86.53¢/gal.

Despite forecasts of much colder weather across the US this week, the February natural gas contract lost 16.1¢ to $5.14/Mcf Friday on NYMEX. "Since the weather forecasts can't get much more bullish, traders got rid of the winter premium ahead of Monday, expecting to buy it back when the new 5-day forecast is confirmed today," analysts at Enerfax Daily reported Monday. "With more cold weather coming, the market could easily jump back higher . . . Expect intense buying on both the futures and physical markets if the extreme cold does arrive, as traders waited last week for weather confirmation today."

In London, the February contract for North Sea Brent oil gained 3¢ to $29.67/bbl Friday on the International Petroleum Exchange. Brokers said the inability of the Venezuelan government to end the national strike and an increasingly aggressive attitude of US officials towards Iraq were keeping oil futures prices near the $30/bbl mark. The February natural gas contract fell 18.4¢ to the equivalent of $3.26/Mcf on IPE.

The average price for OPEC's basket of seven benchmark crudes gained 31¢ to $29.82/bbl Friday. That marked 18 days that OPEC's basket price has exceeded the high side of its price target of $22-28/bbl. That basket price hit a high of $31.06/bbl 2 weeks earlier.

For last week as a whole, however, OPEC's average basket price was down 47¢ to $29.92/bbl. The basket price averaged $24.36/bbl for all of 2001, up from $23.12/bbl in 2001.

OPEC's price band mechanism calls for members to adjust production quotas up or down by 500,000 b/d for each $1/bbl that its average basket price remains above or below the target price band for 20 consecutive trading days.

OPEC ministers agreed Sunday to another special meeting Mar. 11 in Vienna to review market conditions.

Contact Sam Fletcher at samf@ogjonline.com

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