Market watch: Energy futures continue to climb with war tensions

March 10, 2003
Energy futures prices climbed Friday as traders, convinced only a major development will avert an armed conflict between US-led forces and Iraq, covered their short positions ahead of the weekend.

Sam Fletcher
Senior Writer

HOUSTON, Mar. 10 -- Energy futures prices climbed Friday as traders, convinced that only a major development will avert an eventual armed conflict between US-led forces and Iraq, covered their short positions ahead of the weekend.

Heating oil for April delivery shot up 5.29¢ to $1.11/gal Friday on the New York Mercantile Exchange. Unleaded gasoline for the same month escalated by 5.07¢ to $1.16/gal as traders reacted to historically low US inventories at a time of potential war. The April contact for benchmark US light, sweet crudes gained 78¢ to $37.78/bbl Friday, while the May position advanced by 81¢ to $36.35/bbl on NYMEX.

US and UK representatives are expected to present a second resolution Tuesday to the United Nations Security Council, setting Mar. 17 as a final deadline for Iraq to comply with UN disarmament demands. As a result, Matthew Warburton at UBS Warburg LLC, New York, reported Monday, "We expect oil prices to remain firm in the near term, especially given President (George W.) Bush's statement last Thursday indicating a high probability of unilateral US action, regardless the outcome of any (UN Security Council) vote."

He reported commercial traders continued to reduce their net short positions in the futures market last week, primarily by increasing their long positions. However, Warburton said, non-commercial traders took profits last week on long-held net long positions, "even with crude oil prices reaching the highest weekly average since 1990."

With the US government likely to release emergency crude supplies from the Strategic Petroleum Reserve in conjunction with any US-led invasion of Iraq, Warburton said, additional profit taking among noncommercial traders is likely "were oil prices to continue to strengthen this week."

Meanwhile, oil ministers of the Organization of Petroleum Exporting Countries are scheduled to meet Tuesday in Vienna to consider oil production for the second quarter of 2003 and perhaps beyond. "The organization is likely to maintain current quotas, although officials have stated that the alliance would likely suspend quotas and boost output if production from Iraq is interrupted in the event of a war," said Robert Morris at Salomon Smith Barney Inc., New York, in a report issued Monday.

The April natural gas contract gained 14.9¢ to $6.99/Mcf Friday on NYMEX. "The market opened higher and rallied to $7.10(/Mcf) by mid-morning, basically traded between there and $7.05(/Mcf) until mid-afternoon when it dipped back below $7(/Mcf) late," analysts at Enerfax Daily reported Monday.

"Traders were afraid to be short in a transitional market that is moving from winter to spring issues. With winter nearly over and storage near record lows, the market is thin and illiquid," the analysts explained. "The volatile market appears to be cycling, while the back months continue to strengthen. What had been a $2(/Mcf) spread between April and May has now dissipated to about 70¢ and is likely to continue to converge."

Morris at Salomon Smith Barney noted, "Along the natural gas front, composite spot prices subsided but still ended the week at $7.64/MMbtu as forecasts called for some moderation in temperatures across the country this week."

In London, the April contract for North Sea Brent gained 57¢ to $34.10/bbl on the International Petroleum Exchange, with that market's growing perception that war is imminent in the Middle East. The April natural gas contract dropped 5.7¢ to the equivalent of $2.87/Mcf on IPE.

The average price of OPEC's basket of seven benchmark crudes gained 29¢ to $32.79/bbl Friday. For the week as a whole, however, the average OPEC basket price slipped by 17¢ to $32.24/bbl.

So far this year, OPEC's basket price has averaged $31.08/bbl, compared with an average price of $24.36/bbl for all of 2002.