Sam Fletcher
OGJ Senior Writer
HOUSTON, Jan. 6 -- Energy futures prices shot up Friday as Venezuela's oil strike entered its sixth week and US and UK forces continued gearing up for apparently imminent military action against Iraq.
"The US has more than 60,000 troops in and around the Persian Gulf," analysts at Bear, Stearns & Co. Inc. reported Monday. "Britain reportedly has about 15,000 troops in the region. The troop size is expected to double by early February."
Such a massive force suggests that military action against Iraq "must be near," they said. "If an attack is not launched within the 'weather window' (which lasts for only another 3 or 4 months), the troops would have to remain for an unspecified period of time—probably at least another year," the analysts reasoned. They said signs point to military action sometime in the first quarter.
In a separate report Monday, Robert Morris with Salomon Smith Barney Inc., New York, put the potential outbreak of war even earlier, "by late January or early February."
When the anticipated war begins, Bear, Stearns analysts said, "We expect oil prices and oil stocks to follow the same path as in 1991" when US-led forces went to war against "the same enemy (at) the same time of year."
The Bear, Stearns report pointed out, "As military forces have built near Iraqi borders, a 'war premium' ranging from $5-8/bbl has propped up oil prices above $30/bbl," just as in 1991. Again, they expect a short war of about 1 month, with "minimal" casualties—at least among allied forces—with the same economic results as in 1991, when "oil prices fell hard, the stock market soared, and oil stocks underperformed."
They said, "In 1991, within minutes of the first bomb being dropped on Iraq, oil prices fell (to less than $20/bbl) from $34/bbl."
Bear, Stearns analysts said, "Differences between today and 1991 suggest to us that oil prices are unlikely to match the highs seen in 1990, but that the correction is apt to be as severe. First, Iraq is a less important supplier of oil. In the past year, Iraq has supplied about 25% less oil than it did in 1990.
"Second," they continued, "Kuwait's oil production, which ceased in August 1990 through late 1991, is flowing at about 2 million b/d and is capable of producing about 2.4 million b/d. Third, strategic reserves of crude oil and refined products in OECD (Organization for Economic Cooperation and Development) countries, at 1.25 billion bbl, are 50% higher than in 1991, and the ability to release oil is vastly better today."
Once Saddam Hussein is deposed, Bear, Stearns analysts expect Iraq's oil production to "hold steady" under military occupation of the country, rather than being used as a war weapon. Moreover, they said, "We believe the US military will oversee oil production operations to secure volumes near Iraq's current capacity of 3 million b/d or more, vs. production of 2 million b/d in 2002."
Although the long-term outlook for Iraqi oil production is uncertain, they said, "We believe the country could expand output capacity to 5-6 million within 3 years of stable government, a possible doubling of capacity."
The February contract for benchmark US light, sweet crudes shot up $1.23 to $33.08/bbl Friday on the New York Mercantile Exchange, while the March position advanced by $1.12 to $32.22/bbl. Heating oil for February delivery jumped by 3.73¢ to 91.82¢/gal. Unleaded gasoline for the same month was up 3.6¢ to 91.9¢/gal.
With a series of arctic air masses expected to move into the central and eastern US later this week, the February natural gas contract increased 9.3¢ to $5.34/Mcf on NYMEX. "The market ran as high as $5.42(/Mcf), but profit-takers quickly sold back to a $5.21(/Mcf) low. Then came a slow rebound into the close," said analysts at Enerfax Daily. "The latest weather forecast calls for mostly below normal temperature expectations for mid-to-late January, which may be the coldest period of the winter. With the price trend up, funds were seen adding to length while commercials covered to catch up."
In London, the February contract for North Sea Brent crude soared by $1.34 to $30.77/bbl in the International Petroleum Exchange. However, the February natural gas contract dipped by 1.1¢ to the equivalent of $4.01/Mcf on IPE.
The average price for the Organization of Petroleum Exporting Countries' basket of seven benchmark crudes gained 78¢ to $30.83/bbl Friday.
Morris noted in his report that OPEC's price band mechanism calls for members to adjust production quota by 500,000 b/d if its average basket price moves out of the target band of $22-28/bbl for 20 consecutive trading days. "Unless oil prices drop by about $2/bbl or more, this price band mechanism could be triggered on Jan. 16," he said. "OPEC ministers, including Saudi Arabia's, have stated that they may indeed raise output later this month to counter rising oil prices."
Contact Sam Fletcher at [email protected]
