The April contract for benchmark US light, sweet crudes opened at a 3-week high of $63.67/bbl Mar. 6 on the New York Mercantile Exchange as traders prepared for a week of political and economic meetings that could affect future energy supplies.
The most important scheduled event was the Mar. 6 report by the International Atomic Energy Agency to the 35-member United Nations Security Council on the unsuccessful, months-long effort to get Iran to suspend its nuclear energy research. Many specialists fear the program is a covert effort to develop nuclear weapons.
Energy markets opened the week expecting the UN to impose sanctions on Iran in a move that might trigger a retaliatory reduction of crude exports by the second biggest producer in the Organization of Petroleum Exporting Countries. However, Iran earlier assured OPEC ministers that it had no intention of reducing production.
OPEC outlook
OPEC members were to meet Mar. 8 in Vienna to evaluate the crude market and the group’s production quota of 28 million b/d set last June. The US Energy Information Administration was expected to announce that same day another increase in US crude inventories. The build-up of US inventories of crude and petroleum products, plus increasing storage of natural gas, had undercut energy prices in previous weeks.
Nonetheless, said analysts Mar. 6 at Friedman, Billings, Ramsey & Co. Inc., Arlington, Va.: “We expect essentially the same outcome [at OPEC’s March meeting] as its January meeting; an acknowledgement that the market is adequately supplied but no change to its production quota due to the current high crude oil price and supply concerns, especially in Nigeria.” They said, “Any time it seems apparent that OPEC needs to reduce its output target because of potential oversupply, a sharp change to supply or demand occurs, this time in Nigeria, where militants have caused the shutting in of 450,000 b/d of production, or 20% of the country’s total.”
Friedman, Billings, Ramsey analysts expect crude oil prices to trade in a $55-65/bbl range in 2006, with potential upside if US gasoline supplies tighten this spring or additional supply disruptions occur. However, they said, “Expectations for global crude oil demand growth in 2006 may be too high, which could place downward pressure on the commodity if forecasts are lowered.”
Venezuelan Oil Minister Rafael Ramirez earlier called for a cut of 500,000-1 million b/d in OPEC’s output, but no other OPEC members indicated before the meeting any interest in reducing production by the 10 affected members. Iraq is not included in the quota since it’s still struggling to regain its prewar production levels.
Iraq production
J. Marshall Adkins in the Houston office of Raymond James & Associates Inc. pointed out that Iraq has not produced at a sustained rate above 3 million b/d since the first Gulf War.
“While the [UN] sanctions that had crippled its oil industry are long gone, three main obstacles must be overcome before production breaks through its current ceiling near 2 million b/d,” he said.
“First, the level of sabotage and terrorist activity must decrease further. Second, prospective foreign investors must feel comfortable that their role in the oil industry’s development will be respected by future Iraqi leaders. Finally, the general political and economic orientation of the new government must become clear,” Adkins said. “All three of these preconditions may be met over time, but even under a best-case scenario, the time it takes will be years, not months.”
Meanwhile, winter demand for heating fuels is winding down. “After the cold start to March, forecasts for the balance of the month call for temperatures to gradually warm up to springtime temperatures,” said Ronald J. Barone, managing director of equity research for the Natural Gas & Electric Utilities Group of UBS Securities LLC, New York. “Following the supply disruptions caused by the destructive 2005 hurricane season, the country entered the winter heating season with grave concern that demand could outstrip supply and result in an energy crisis,” Barone said. “Fortunately, the country is experiencing one of the warmest winters in history and a large gas surplus.”
That situation may be short-lived, however, with the National Hurricane Center reporting the annual number of hurricanes has increased since 1995 in a trend expected to continue over the next 10 years. “Many forecasters are calling for another intense hurricane season in 2006,” Barone said. “Given the increasing probability of adverse natural phenomenon in the gulf, be it in the form of hurricanes or earthquakes (and the unlikelihood that another mild winter will come to the rescue), gas prices will remain highly sensitive to Mother Nature supply shocks.”
(Online Mar. 6, 2006; author’s e-mail: [email protected])
