MARKET WATCH
Energy prices inch higher

Sam Fletcher
Senior Writer

HOUSTON, Aug. 28 -- Energy prices inched slightly higher Aug. 25 as the United Nations dispute with Iran dragged on and Tropical Storm Ernesto continued to threatened the Caribbean.

Ernesto's winds weakened from hurricane speeds as it swept over Haiti on Aug. 27 and struck Cuba on Aug. 28. It is expected to strengthen into a hurricane again before it reaches Florida on Aug. 30. Although Ernesto is not expected to hit offshore rigs and production platforms in the Gulf of Mexico, some companies are evacuating nonessential personnel.

Meanwhile, Iran's ambiguous response to an offer of incentives from the five-member UN Security Council plus Germany in return for abandoning its uranium enrichment program seems to have had the planned effect of cracking the group's solidarity on that issue. Russia rejected talk of sanctions against Iran, and France warned last week against conflict with the second-largest oil producing country in the Organization of Petroleum Exporting Countries.

The group earlier gave Iran until Aug. 31 to decide if it will halt the program that some western officials believe to be a cover for the manufacture of nuclear weapons.

Energy prices
The October contract for benchmark US light, sweet crudes gained 15¢ to $72.51/bbl Aug. 25 on the New York Mercantile Exchange. The November contract was up by 12¢ to $73.44/bbl. Unleaded gasoline for September delivery increased by 3.36¢ to $1.90/gal. Heating oil for the same month inched up by 0.04¢ but remained virtually unchanged at $2.03/gal.

The September natural gas contract gained 7.8¢ to $7.16/MMbtu on NYMEX. Many market analysts and traders are "still convinced" that gas prices will soon collapse, "despite the dramatic reduction of the year-over-year gas storage surplus over the past 2 months," said analysts in the Houston office of Raymond James & Associates Inc. "Many are claiming a hurricane as the only potential savior to reduce the lofty 291 bcf year-over-year surplus currently present in storage. We believe the gas market is now on track to end the injection season (Oct. 31) with a very manageable [3.3 tcf] of gas in storage without a hurricane," they said. The gas market bears "underestimate the amount of post-hurricane demand destruction that actually took place last year," said Raymond James.

"Our analysis of gas storage data (adjusted for weather variations) implies that some 9-10 bcfd of gas demand was destroyed relative to 2004 (due to both infrastructure damage and higher prices). After considering the supporting Department of Energy data, which detail a swing in demand of over 5 bcfd from August to September [and] October, we are conservatively modeling that 7 bcfd of demand that was lost last September-October will be back in the system this September-October," the analysts said.

In London, the October IPE contract for North Sea Brent crude increased by 2¢ to $72.70/bbl. Gas oil for September rose by $9.50 to $658.25/tonne.

The average price of OPEC's basket of 11 benchmark crudes increased to $67.96/bbl on Aug. 25 from a revised price of $67/bbl in the previous session. So far this year, OPEC's basket price has averaged $63.11/bbl.

Contact Sam Fletcher at samf@ogjonline.com.

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