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2006 crude prices may have bottomed out

Sam Fletcher
Senior Writer

The December contract for benchmark US crudes apparently bottomed out at a new floor of $57.05/bbl in intraday trading Oct. 31 before closing at $58.73/bbl, up 37¢ for the day in a late technical rally that forced many traders to cover lower-priced sales positions on the New York Mercantile Exchange.

The December crude contract climbed to $59.14/bbl Nov. 3 on NYMEX in the wake of an apparently false telephone bomb threat against BP PLC's 400,000 b/d refinery in Whiting, Ind. Meanwhile, a militant group in Nigeria gave international oil companies 72 hours to evacuate facilities in the prolific Niger Delta prior to threatened attacks on as many as 20 facilities during "Operation Black November."

An earlier threat to the Ras Tanura oil terminal off Saudi Arabia prompted a sharp rise in oil prices, which then declined when no attack transpired (OGJ Online, Oct. 30, 2006). However, oil prices rebounded sharply on renewed threats of attacks on the international oil infrastructure, missile tests by Iran, and strong employment numbers that quelled fears of a sharp slowdown in the US economy. "Interestingly though, oil prices really didn't react to [the latest] US inventory data, which revealed a slightly less-than-expected draw in crude stocks along with much larger-than-projected draws in gasoline and distillate inventories," said Robert S. Morris, Banc of America Securities LLC, New York.

The Energy Information Administration reported that commercial inventories of benchmark US crudes increased by 2 million bbl to 334.3 million bbl in the week ended Oct. 27. The rise followed an unexpected drop of 3.3 million bbl the previous week when the 3-day closure of the Louisiana Offshore Oil Port cut US crude imports by a whopping 936,000 b/d to 9.5 million b/d. Gasoline stocks fell 2.8 million bbl to 204.6 million bbl in the latest period. Distillate fuel inventories dropped 2.7 million bbl to 141.3 million bbl, with a 3.2 million bbl increase in ultralow-sulfur diesel fuel offset by a 4.4 million bbl drop in conventional diesel and a 1.5 million bbl decline in heating oil.

Although members of the Organization of Petroleum Exporting Countries (other than Iraq) said they would cut crude production by 1.2 million b/d to 26.3 million b/d, the industry was still looking for evidence of any serious rollbacks by Nov. 1. Meanwhile, Indonesia said it would not reduce production. Its September production topped out at 862,900 b/d and it was a net importer of crude in May-July, sources said. Nigeria and Venezuela also have production problems and generally are not expected to reduce output either.

Natural gas
The December natural gas contract increased 7¢ to $7.88/MMbtu Nov. 3 on NYMEX, its fourth consecutive gain in as many sessions. After previously increasing from a 4-year low, composite spot natural gas prices retreated that week, however, due largely to forecasts of warm weather. Although residual fuel oil prices dropped below natural gas prices in some key regions, Morris said, "We do not believe any fuel switching away from natural gas and back to residual fuel oil occurred."

EIA reported withdrawal of 9 bcf of natural gas from US underground storage in the week ended Oct. 27, compared with injections of 19 bcf the previous week and 27 bcf during the same period last year. US gas storage was at 3.45 tcf, up 288 bcf from a year ago and 276 bcf above the 5-year average (OGJ Online, Nov. 2, 2006). Withdrawals of gas from US storage during October "are quite rare," said analysts at Barclays Capital Inc., London.

Meanwhile, Ronald J. Barone, managing director of UBS Securities LLC, New York, said, "Shortages of natural gas feedstock in the global market are significantly constraining both the operation of existing liquefaction plants and the development of new LNG projects. Several large exporting terminals around the world are sitting idle due to the lack of available natural gas supply. Some of the impacted gas-exporting counties include major international players such as Oman, Malaysia, Indonesia, Trinidad, and Nigeria. Oman LNG, for example, has 1 million tons/yr of spare capacity due to feedstock shortages," Barone added. "With most of the existing production already committed under long- or medium-term contracts, the shortage of feedstock to feed the available spare capacity is having a greater effect on an already constrained spot market. Consequently, importing counties, such as the US, are experiencing a steady decline of LNG shipments. (The US decline is largely due to upstream difficulties in Trinidad, the country's largest exporting partner, specifically at Trinidad's Atlantic LNG Train 4.)"

(Online Nov. 6, 2006; author's e-mail: samf@ogjonline.com)


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