Sam Fletcher
Senior Writer
HOUSTON, Feb. 14 -- Oil futures prices continued to climb Thursday, with many traders seeing the buildup of US and UK forces in the Middle East as a signal that the two countries are moving closer to war with Iraq.
But the real reason that benchmark US crude has remained above $30/bbl for the last 8 weeks is "a very tight oil balance as evidenced by low oil storage and a marked shrinkage in (the Organization of Petroleum Exporting Countries') spare production capacity," said Michael Rothman, senior energy market specialist, and Steven A. Pfeifer, senior integrated oils analysts for Merrill Lynch Global Securities Research & Economics Group.
The March contract for benchmark US light, sweet crudes gained 59¢ to $36.36/bbl Thursday on the New York Mercantile Exchange, while the April position rose 64¢ to $35.18/bbl.
No war premium?
Because of "numerous false starts" toward war with Iraq over the last 15 months, said the Merrill Lynch analysts, "Oil traders 'bidding up' the price of crude because of war-related concerns has, it seems, been largely absent to this point." However, they said, "It seems to us that oil traders may start to finally discount the prospects of war and the related interruption to Iraq's oil flows, compelling us to adjust our very short term oil price ranges."
As a result, Merrill Lynch adjusted the top end of its estimated 30-day price range for benchmark West Texas Intermediate crude to $41/bbl from the previous $36.25/bbl, with the bottom end moving up to $33/bbl from $28.75/bbl previously. The analysts said, "It is critical to note that we continue to expect crude prices to eventually gravitate back into the mid-$20(/bbl) range, as compared to the consensus call for oil to fall back below the $20 level."
The two analysts reported that, during the 1990-1991 Gulf War, petroleum stocks among Organization for Economic Cooperation and Development countries "were 125 million bbl above normal, and inventories at the start of this month are estimated by us as having been 123 million below normal." In addition, they said, OPEC had 6.8 million b/d of spare production capacity at the time of Iraq's August 1990 invasion of Kuwait, compared with extra capacity of "no more than 1.7-2 million b/d today."
As a result, the analysts said, "The ability of OPEC to engineer a 'soft landing' in crude prices remains hampered for the near term," even assuming that "no harm befalls" the production or export facilities in Saudi Arabia, Kuwait, or Iraq, in the event of war.
Matthew Warburton at UBS Warburg LLC, New York, reported Iraqi crude exports under the United Nations' oil-for-aid program totaled 1.7 million b/d during the first week of February, compared with a 4-week average of 1.92 million b/d. "This is the volume (that) would be lost in the days ahead of any military action against Iraq," he said.
Other prices
Heating oil for March delivery jumped by 2.23¢ to $1.05/gal on NYMEX as traders reacted Thursday to earlier reports of sharp draws on US inventories of that commodity. However, unleaded gasoline for the same month slipped by 0.22¢ to $1.0314/gal because of reported builds.
The March natural gas contract lost 4.5¢ to $5.74/Mcf Thursday on NYMEX. "The market opened down but suddenly jumped to $5.955(/Mcf) after the Energy Information Administration reported (Thursday) a 150 bcf withdrawal (from) storage inventories for last week," said analysts Friday at Enerfax Daily. They said gas futures prices "fell back just as quick in the early afternoon before recovering somewhat at the end of the session. The locals bought in, then sold back their positions, so the market collapsed, and it went back to near where it started."
With NYMEX to be closed Monday for the Presidents' Day holiday, they said, "Nobody wants to be caught short, especially going into a weekend where the threat of crude oil supply disruptions from the Middle East and terrorist threats at home are pressuring energy prices. Also, the very real threat of continued cold in the Northeast could temper any downside moves. Look for more volatility today."
In London, the March contract for North Sea Brent oil increased by 61¢ to $33.06/bbl on the International Petroleum Exchange. The March natural gas contract jumped by 8.7¢ to the equivalent of $3.10/Mcf on IPE.
The average price for OPEC's basket of seven crudes gained 61¢ to $31.91/bbl Thursday.
Contact Sam Fletcher at [email protected]
