June starts with busy market day

Sam Fletcher
Senior Writer

June began with a busy day on oil and gas markets. The July futures crude contract on the New York Mercantile Exchange fell on June 1 for a second session as the US, UK, Germany, France, China, and Russia hammered out a slate of incentives for Iran to give up uranium enrichment for its nuclear power program.

The US government agreed to participate in negotiations to persuade Iran to halt the program, which could produce weapons-grade uranium. That would be the first direct contact between the US and Iranian governments in the 26 years since the US Embassy in Tehran was seized by Islamic revolutionaries. The move prompted "speculation that the situation is now closer to a benign resolution," said Paul Horsnell, Barclays Capital Inc., London. "However, we see the offer as being more of an indication of the narrowing of options and the acceleration of pace in the issue than as a precursor to the breaking of the ice. In order to maintain the existing coalition and to achieve some element of support from China and Russia, the offer was one that was perhaps almost forced. However, unless Iran backs down on enrichment fairly swiftly—and at the moment we consider that unlikely—then this could be seen as another box checked on the list that points towards a military solution."

Ayatollah Ali Khamenei, Iran's supreme leader, threatened a global shortfall of oil if Iran is penalized for its nuclear program. He "specifically referred not only to Iran's own supplies, but also to oil shipments passing through the Persian Gulf through the strategic Strait of Hormuz," said analysts in the Houston office of Raymond James & Associates Inc.

The July contract for benchmark US crudes lost a total of $1.69 over two sessions to close at $70.34/bbl June 1 on NYMEX. But it rebounded to $72.33/bbl June 2 following disruptions at several US refineries and the kidnapping of foreign oil workers in Nigeria, who were released June 4.

Hurricanes
June 1 marked the start of the hurricane season in the North Atlantic and Gulf of Mexico, causing the July natural gas contract to escalate a total of 50¢ May 31-June 2 to a 3-week high of $6.62/MMbtu on NYMEX. "Fresh memories of last year's devastating hurricanes prompted the rally," said analysts at Enerfax Daily. The 2006 hurricane season is expected to be unusually active, although not as bad as the record 2005 season. Weather experts at Colorado State University said the west and central sections of the Gulf of Mexico should be spared the brunt of hurricane activity this year with currents pushing storms toward Florida and the US East Coast.

As of June 1, the US Minerals Management Service still listed 71 platforms as evacuated following Hurricanes Katrina and Rita last year. MMS said 227,888 b/d of crude were still shut in on federal leases in the gulf, 15.2% of the normal daily production from those waters. Officials said 1.1 bcfd of natural gas, 11% of daily production, also were shut in. Production lost Aug. 26-June 1 totaled 162.4 million bbl of crude and 784.5 bcf of gas, 29.7% and 21.5%, respectively, of annual production from federal leases in the gulf.

"Natural gas has moved up steadily for the past 4 days from a sub-$6 to mid-$6 range," said analysts June 5 in the Houston office of Raymond James & Associates Inc. "Though still early to call it a secular up trend, we do feel that gas has shown a resilient floor around $6/MMbtu and allowed E&P companies to generate above-average returns in most operating areas. The increase is likely driven by the marked decrease in noncommercial short contracts."

OPEC
Ministers of the Organization of Petroleum Exporting Countries met in Caracas on June 1. As expected, they voted to maintain the existing production limit of 28 million b/d for the 10 member countries other than Iraq.

In the 2 weeks through May 2, the front-month contract for benchmark US crudes hovered at $70-72/bbl on NYMEX.

"On the upside it has been capped by perceived easier geopolitics following the [US] proposal [to negotiate with Iran] and by producer hedging," said analysts at Petromatrix GMBH, Zug, Switzerland. "On the downside, it has been supported by buyers taking an option on summer disruptions and a weak dollar. We are not yet back to the record highs but getting closer, and our open interest model now suggests a crude market which is underpriced by $2/bbl," based on the June 2 closing price.

(Online June 5, 2006; author's e-mail: samf@ogjonline.com)


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