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Storms, OPEC guide oil prices

Sam Fletcher
Senior Writer

Front-month crude prices fluctuated at $111-122/bbl through most of August on the New York Mercantile Exchange but fell sharply Aug. 28-Sept. 5 primarily as Hurricane Gustav proved less of a threat to offshore production and Gulf Coast refining than some anticipated.

October benchmark US light, sweet crudes dropped $2.56 to $115.59/bbl Aug. 28, pulled down initially by falling prices in the natural gas market. The contract closed at $106.23/bbl Sept. 5, having lost $9.20/bbl over the first five trading sessions in September as the euro dropped to its lowest level against the dollar this year and as gulf oil and gas operations shut in by Gustav began coming back on stream. As Gustav was downgraded prior to landfall in Louisiana Sept. 2, traders brushed aside the price support provided by that storm, and prices fell to a 5-month intraday low of $105.46/bbl; it slipped to a fresh intraday low of $105.13/bbl Sept. 5 amid concerns of a weak global economy and declining demand.

But oil prices were up in early trading Sept. 8 as Hurricane Ike ripped through Cuba. The storm was expected to enter the southeastern Gulf of Mexico on Sept. 9, headed for the US Gulf Coast. Shell Oil Co. said Sept. 6 that 615 of its 1,400 workers evacuated ahead of Gustav had returned to work offshore. However, the company said it would not redeploy the rest "because of the possibility that Hurricane Ike might enter the Gulf of Mexico and require another evacuation," officials said.

OPEC outlook
"Further impending hurricanes may postpone a quick test of $100/bbl crude and limit pressure on the Organization of Petroleum Exporting Countries to reduce output at its Sept. 9 meeting," said analysts at KBC Market Services, a division of KBC Process Technology Ltd. in the UK. "We do not expect Saudi Arabia to take pre-emptive steps to keep prices above this threshold. But OPEC knows that it must reduce supplies at some point in the coming months, and any return to double digit crude prices may be of short duration."

An OPEC decision to maintain quota levels "could amount to a de facto cut, which might not be a problem for the Saudis because the 500,000 b/d Arab Extra Light Khursaniyah field could give Saudi Arabia higher per-barrel revenues if it rolls off heavier production in equal measure," said analysts at Friedman, Billings, Ramsey & Co. Inc. (FBR), Arlington, Va., prior to the cartel's meeting. "The counterbalance, of course, is that other OPEC producers—especially Iran and Venezuela—require higher per-barrel prices than Saudi Arabia to fund domestic spending."

Analysts at the Centre for Global Energy Studies (CGES), London, noted that today's oil market "looks very different" since the meeting of OPEC ministers in March. Then, they said, "The outlook for demand growth still appeared relatively robust and economic weakness was largely confined to the US—at least in the view of OPEC. Now, oil demand is falling fast in the US and the rest of the Organization for Economic Cooperation and Development, the economic outlook for the developed economies appears to worsen by the day, and there are even fears that the slowdown will begin to have an effect on the economic health of the Asian economies that supply many of the manufactured goods bought in the West. In March, oil prices were marching upwards, propelled, according to OPEC, by the weakness of the US dollar, rising inflation and speculation. Oil prices have been falling ahead of the September meeting."

CGES analysts said, "The change in market sentiment from bullish to bearish is amply illustrated by the lack of any real price response to the loss of 1 million b/d of light, sweet Caspian crude in early August after an explosion on the [Baku-Tbilisi-Ceyhan] oil pipeline and the closure of the export routes across Georgia, or the loss of 1.3 million b/d of production as Hurricane Gustav swept through the Gulf of Mexico."

They observed, "With oil prices still above $100/bbl there have been few calls for a cut in the organization's output quotas, although the usual suspects, led by Venezuela and Iran, have been calling for a reduction in output by those member-countries, particularly Saudi Arabia, who are exceeding their output quotas." CGES said, "Should oil prices continue to fall, Saudi Arabia will come under pressure from other OPEC members to unwind some of its recent production increases, but there is every indication that the kingdom shares the desire of other member-countries to prevent oil prices from falling much below $100/bbl."

(Online Sept. 8, 2008; author's e-mail: samf@ogjonline.com)


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