MARKET WATCH
Energy prices retreat before OPEC hikes output quota

Sam Fletcher
Senior Writer

HOUSTON, June 15 -- Energy prices fell slightly June 14 in profit taking from the recent run-up, but markets managed to hang on to most of their previous gains ahead of a quota hike by the Organization of Petroleum Exporting Countries.

As was generally expected, OPEC ministers at their June 15 meeting in Vienna agreed to raise the cumulative production quota for 10 members, minus Iraq, by 500,000 b/d to 28 million b/d, effective July 1, which is about the amount OPEC was already producing. They further authorized OPEC Conference President Ahmad Fahad Al-Ahmad Al-Sabah to boost the production quota by another 500,000 b/d, after consulting other heads of OPEC delegations, if crude prices do not fall prior to the group's next meeting on Sept. 19.

But "before the ink [on that agreement] was even dry, half the ministers were outside telling the press that the increase would have no effect at all," noted Paul Horsnell, Barclays Capital Inc., London. "They happen to be right, but perhaps the bluff could have been played out with just a little more panache."

Market outlook
OPEC's communiqué at the end of the meeting was correct in concluding "that the potential shortage of refining capacity capable of producing enough middle distillates of regulated quality is a key friction point for the market," Horsnell said. However, he said OPEC erred in claiming that increased crude prices are exacerbated by increased speculation in the oil futures markets. "In any other market, increased liquidity would be seen as a good thing, but in oil the natural response of politicians in many key consuming countries seems to be to see price discovery as a threat," said Horsnell.

"For the first 9 days of June, US gasoline demand is averaging 9.51 million b/d higher than gasoline demand has ever reached for any month. The growth rate [from a year ago] is running at 3%, the fastest since March 2004. Distillate demand for June to date is running at 8.1%. There is absolutely no sign of flagging oil demand in the US. Indeed, oil demand growth is actually speeding up," he said.

"In short, the market needs to have a look above $60[/bbl in crude prices] to see if that changes the demand dynamic, because $50[/bbl] has achieved very little in that respect," Horsnell said. Moreover, he said, "Saudi Arabia is now the only producer in the world with any significant degree of spare capacity. We would then expect the market to continue to trundle on towards $60[/bbl].

On June 15, the US Energy Information Administration reported commercial US inventories of crude fell by 1.8 million bbl to 329 million bbl during the week ended June 10. Gasoline stocks dropped by 900,000 bbl to 215.7 million bbl during that same period, while distillate inventories increased by 2.5 million bbl to 110.2 million bbl.

OPEC members also voted to implement on June 16 a new reference basket of 11 benchmark crudes, including Saharan Blend from Algeria; Minas, Indonesia; Iran Heavy; Basra Light, Iraq; Kuwait Export; Es Sider, Libya; Bonny Light, Nigeria, Qatar Marine; Arab Light, Saudi Arabia; Murban, UAE, in place of the previous Dubai; and BCF 17, Venezuela, in place of the previous Tia Juana. Mexico's Isthmus crude is eliminated from the new basket.

As a result, the API gravity for OPEC's new basket is heavier at 32.7°, compared with 34.6° for the previous basket of seven benchmark crudes. The sulfur content of the new reference basket also is more sour at 1.77% vs. 1.44% previously. That is in keeping with heavier sour incremental crudes that OPEC would bring to market. It also would lower OPEC's basket price by $1.50-2/bbl, Horsnell said.

Energy prices
The July contract for benchmark US light, sweet crudes lost 62¢ to $55/bbl June 14 on the New York Mercantile Exchange, while the August contract dropped 85¢ to $55.97/bbl. On the US spot market, West Texas Intermediate at Cushing, Okla., was down by 62¢ to $55.01/bbl. Heating oil for July delivery fell by 2.45¢ to $1.64/gal on NYMEX. Gasoline for the same month declined by 1.33¢ to $1.54/gal.

The July natural gas contract lost 3.2¢ to $7.23/MMbtu, "dragged lower by weaker crude oil prices, milder late-week weather forecasts, and profit taking," said analysts at Enerfax Energy. "Temperatures in New York and Chicago are expected to cool to below normal later this week, with highs dropping to the low to mid-70s," they said.

In London, the July contract for North Sea Brent crude plunged by $1.05 to $53.73/bbl on the International Petroleum Exchange.

However, the average price for OPEC's basket of seven benchmark crudes jumped by $2.22 to $52.05/bbl on June 14.

Contact Sam Fletcher at samf@ogjonline.com

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