Market watch: Energy futures prices continue rally on market uncertainties

Jan. 21, 2003
Oil futures prices continued to rise on the London market Monday, while the New York Mercantile Exchange was closed for the Martin Luther King holiday.

Sam Fletcher
OGJ Senior Writer

HOUSTON, Jan. 21 -- Oil futures prices continued to rise on the London market Monday, while the New York Mercantile Exchange was closed for the Martin Luther King Jr. holiday.

Brokers said oil prices would likely remain extremely volatile pending further developments of United Nations' weapons inspections in Iraq. Chief UN weapons inspector Hans Blix is to make his first report of findings to UN officials on Jan. 27.

International news agencies recently quoted Sheikh Ahmed Zaki Yamani, Saudi Arabia's former oil minister, as predicting oil prices could soar to $100/bbl if US-led military forces attack Iraq.

However, veteran market analyst Stephen Smith, president and founder of Stephen Smith Energy Associates, Natchez, Miss., reported Tuesday that, even if both Iraq and Venezuela suffer serious production problems throughout this year, "crude prices would likely be in the $30-40(/bbl) range but not 'go ballistic.'"

Worse case scenario
Under a worst case scenario envisioned by Smith, the current general strike aimed at ousting Venezuelan President Hugo Chávez could degenerate into "a long-term civil war," with Venezuela's oil production never averaging more than 700,000 b/d for the rest of this year, down from 2.8 million b/d last November.

Smith also envisions war in Iraq driving a desperate Saddam Hussein to dynamite many of his own oil fields and pumping stations "effective Apr. 1," slashing that country's average oil production to 400,000 b/d for the rest of this year, from an average 2.4 million b/d during the fourth quarter of 2002. That damage "would take the longest to correct," he said.

In such a situation, Smith said, the remaining nine members of the Organization of Petroleum Exporting Countries would have to operate at 93% of their collective production capacity to meet the group's new production quota of 24.5 million b/d, with their remaining spare capacity reduced to 1.69 million b/d.

The release of additional oil from the US Strategic Petroleum Reserve and other stockpiles among Organization for Economic Cooperation and Development (OECD) countries should cap world oil prices at $40/bbl or less, said Smith.

Other analysts declared $40/bbl oil as "survivable" at an energy forum in Houston last week (OGJ Online, Jan. 20, 2003).

Best case likely
However, Smith claims his best-case scenario is far more likely to occur. It assumes "that any military engagement would begin with an intensive program of air strikes that would reduce the odds of damage to any Persian Gulf oil loading ports outside Iraq," he said.

"Iraqi oil loadings might be temporarily delayed for a month or 2, but . . . no structural damage to oil fields, key pumping stations, or loading ports would occur," he said.

In that optimistic outlook, Smith assumes "that somehow in the next 2-3 months the current impasse between Chávez and his opponents is resolved. Then, over a period of 3-4 months, field production is restored from its recent 30% of capacity to about 95% of capacity."

In that case, he said, OPEC members would face the opposite problem of having to reduce production in phases from an "expected first quarter utilization rate of 89%" to "80% by the fourth quarter to prevent an inventory glut from developing."

Moreover, Smith said, "This does not consider the added pressure that might come from a post-war Iraq that would likely be free to export as it wished."

To meet its objective of stable prices, OPEC must maintain global oil inventories near seasonal norms. "But with output from two producers now being highly uncertain, the task of the (remaining) OPEC-9 is to swing their production so as to offset the random production swings of the (unreliable) OPEC-2," Smith said.

Energy prices
The March contract for North Sea Brent oil gained 11¢ to $30.65/bbl Monday on the International Petroleum Exchange in London. However, the February natural gas contract dipped by 3.6¢ to the equivalent of $3.37/Mcf on IPE.

The average price for OPEC's basket of seven benchmark crudes increased by 19¢ to $31.21/bbl Monday.

Contact Sam Fletcher at [email protected]