Sam Fletcher
OGJ Senior Writer
HOUSTON, Jan. 7 -- Energy futures prices fell Monday, with traders taking profits from last week's rally, amid reassurances that the Organization of Petroleum Exporting Countries and other major oil producers are willing to increase production to offset supply disruptions.
In separate meetings with Saudi Arabia's Minister of Petroleum Ali I. Naimi and Sheikh Ahmad Al-Fahad Al-Ahmad Al Sabah, Russian Energy Minister Igor Yusufov agreed to cooperate with OPEC to stabilize oil prices.
Meanwhile, the US Energy Department said Monday it is allowing oil companies to defer February delivery of 3.1 million bbl of crude to the Strategic Petroleum Reserve until the end of September to help offset supply losses from the general strike in Venezuela, now in its sixth week.
US inventories of crude and petroleum products are at a 26-year low as a result of that strike. The US market gets nearly half of Venezuela's normal export capacity of 2.4 million b/d of oil and petroleum products.
"Consequently, US crude, plus product, stocks ended December 7.7% below their 10-year average vs. 7% below normal at the beginning of the month," said Robert Morris, Salomon Smith Barney Inc., New York, in a Tuesday report. US crude inventories alone were down 11.4% at the end of December vs. 9.6% below normal at the start of the month.
Moreover, Morris said, "Prior to December, much of the decline in US crude inventories (during 2002) can be attributed to a build in the US Strategic Petroleum Reserve, which is not included in the tabulation of commercial stocks. In addition, there appears to be a significant unaccounted draw in jet fuel inventories, which may have shifted from commercial to military stocks."
He noted, "Both of these events would be consistent with what occurred leading up to and during Operation Desert Storm in 1991" when US-led forces attacked Iraq's invasion force in Kuwait. Morris has predicted a similar attack on Iraq will start in late January or early February.
In a series of separate reports Tuesday, analysts at UBS Warburg LLC, New York, pointed out that United Nations inspectors now searching Iraq for weapons of mass destruction are to report results to UN officials on Jan. 27, the day before President George W. Bush is slated to deliver his annual "State of the Union" address to Congress.
"Military action (against Iraq) may not yet be inevitable, but the prospect of war beginning in February overshadows the oil market," they said.
However, UBS Warburg analysts noted, "Anticipation of a loss of 1.7 million b/d of Iraqi exports may be more supportive of (oil) prices than the loss of supply itself. If Iraqi exports are interrupted, we expect replacement supplies from US (and) IEA (International Energy Agency) strategic stocks and higher OPEC supply will quickly replace Iraqi barrels and mitigate any upward pressure on prices."
The other nine OPEC members cannot replace supply losses from both Iraq and Venezuela, however, analysts said. Moreover, the US refineries that Venezuela supplies are configured to process only heavy oils. Saudi Arabia also produces heavy oil, but shipments to US markets take weeks to complete, instead of days on the Venezuela-US route.
Therefore, UBS Warburg analysts said, the "gap in the supply chain created by the Venezuelan strike" will likely remain evident "throughout the first 4 months of 2003 and perhaps beyond."
For those and other reasons, UBS Warburg Tuesday increased its price projections for benchmark West Texas Intermediate crude to an average $25/bbl in 2003, up from $23/bbl previously; and to $21.50/bbl in 2004, up from $20/bbl. It also increased its price projections for natural gas to averages of $4/MMbtu in 2003, $3.75/MMbtu in 2004, and $3.50/MMbtu in 2005, up from a previous expectation of $3.25/MMbtu for all 3 years.
Meanwhile, the February contract for benchmark US light, sweet crudes dropped 98¢ to $32.10/bbl Monday on the New York Mercantile Exchange, while the March position lost 78¢ to $31.44/bbl. Unleaded gasoline for February delivery plunged 3.7¢ to 88.2¢/gal, wiping out its 3.6¢/gal gain from Friday. Heating oil for the same month fell 3.03¢ to 88.79¢/gal.
The February natural gas contract dropped 4.09¢ to $4.94/Mcf on NYMEX. During that session, it bottomed around $4.85/Mcf, "a key technical support area," before being boosted higher by a late round of buying, reported analysts at Enerfax Daily.
"Marketers tried to define their risk, buying or selling calls just to keep their head above water. But (a) new, slightly moderate weather forecast sent locals searching for sell-stops, and funds joined the selling when those stops were triggered," they reported. "There is an incredible sensitivity to weather, as evidenced by the only slightly moderated forecast of late-January cold sending the market tumbling."
In London, the February contract for North Sea Brent crude lost 57¢ to $30.20/bbl on the International Petroleum Exchange. However, brokers said prices were set to rebound strongly. The February natural gas contract plummeted 16.6¢ to the equivalent of $3.84/Mcf on IPE.
The average price for OPEC's basket of seven benchmark crudes lost 12¢ to $30.71/bbl Tuesday.
For last week as a whole, OPEC's basket price averaged $30.39/bbl, down 13¢ from the previous week. For all of December, it averaged $28.39/bbl, up sharply from an average $24.29/bbl in November. OPEC's basket price averaged $24.36/bbl through 2002, up from $23.12/bbl in 2001.
Contact Sam Fletcher at [email protected]
