Sam Fletcher
Senior Writer
HOUSTON, Mar. 21 -- Assured of sufficient supplies of oil and petroleum products, traders continued to pare down the war premium on energy futures prices Thursday despite military reports that a small number of Iraqi oil wells were on fire in the area of Basra, near the border with Kuwait.
"Indications from industry sources. . .are that any fires at this point are more likely due to the lighting of oil above ground and not due to the detonation of an explosive device," said Tyler Dann, analyst in the Houston office of Banc of America Securities LLC (BAS), in a Friday report. However, he said, "It has been speculated that (Iraqi President) Saddam (Hussein) had multiple oil fields rigged with explosives that could be triggered by one person."
Dangers remain
Damage to Iraq's oil fields is still a danger, said Michael C. Lynch, head of Strategic Energy & Economic Research Inc., Winchester, Mass. "If up to 1 million b/d of (production) capacity is destroyed, the effect will not be severe, as Saudi Arabia can offset it. More than that, and the market will need a release from strategic reserves," he said. Any release of emergency oil supplies would have an immediate effect on markets, pushing oil prices lower, said Lynch.
Meanwhile, Kuwaiti officials reported they are maintaining oil production at 2.4 million b/d and will close their Rawdhatain and Sabriyah fields, which border Iraq, only if necessary.
Since the start of the war, officials of the Organization of Petroleum Exporting Counties have temporarily set aside production quota restrictions and reiterated previous pledges to make up any shortfalls in oil supplies from Iraq. OPEC ministers earlier said they would keep at least 2 million b/d of extra production capacity ready for use in case of a world supply shortage. However, the International Energy Agency suggested that OPEC has spare capacity of less than 1 million b/d (OGJ Online, Mar. 12, 2003).
Meanwhile, Dann said, "We understand that the pipeline from northern Iraq to the export terminal at Ceyhan in Turkey is now pumping at a minimum rate of 500,000 b/d with no tankers scheduled to load the approximate 4 million bbl of Iraqi oil now waiting in storage at the other end." Other sources report oil tanker traffic in the Persian Gulf has slowed since US-led forces launched the attack on Iraq (OGJ Online, Mar. 21, 2003).
"Because global stocks are tight, significant reduction in tanker loading for a week or more (at gulf terminals in Kuwait, Saudi Arabia, and Iran) could tighten markets over the next 2 months," Lynch warned. "Low inventories and the tight OPEC capacity situation means that companies might hoard, i.e., become reluctant to release supplies into the market. This could create a vicious circle, particularly without a release from strategic reserves."
Furthermore, he said, "US gasoline supplies are now quite tight, and if US consumers panic and rush to fill their tanks, it could trigger spot shortages (principally at wholesalers), news of which would encourage further hoarding."
So far there is no evidence of panicked buying among US consumers in the face of anticipated reductions of fuel prices at the pump. Five large US fuel suppliers and the American Automobile Association issued a statement Thursday assuring consumers of adequate fuel supplies (OGJ Online, Mar. 20, 2003).
Despite "some logistical constraints and relatively minor disruptions to Iraqi oil infrastructure," previous market speculation that the war might trigger major displacement of Middle East oil supplies "has waned considerably," Dann said.
"Assuming no significant long-term oil field damage, it won't be long until OPEC must deal with seasonal demand retrenchment and its own oversupply," he said. "While (it is) politically difficult to discuss at this point, we expect that OPEC could easily be talking about production quota reductions, once military activity subsides."
A potential problem, however, is the escalation of violence in Nigeria in relation to an upcoming election. "Major oil companies have begun airlifting villagers to safety," Dann reported. "ChevronTexaco (Corp.) Thursday declared force majeure and shut in all of its onshore and swamp production in the Western Niger Delta, 140,000 b/d of its 450,000 b/d (gross) Nigerian production."
Royal Dutch/Shell Group shut in 126,000 b/d of its Nigerian gross production of 800,000 b/d and evacuated personnel (OGJ Online, Mar. 20, 2003). While Shell officials indicated they expect to make up that loss elsewhere in Nigeria, ChevronTexaco said its disruption would impact its March and April deliveries.
Market prices
The April contract for benchmark US light, sweet crudes dropped $1.27 to $28.61/bbl Thursday on the New York Mercantile Exchange. The May position was down $1.24 to $28.12/bbl. Unleaded gasoline for April delivery plummeted 3.26¢ to 90.99¢/gal. Heating oil for the same month fell 1.17¢ to 82.44¢/gal.
The April natural gas contract inched up 2.8¢ to $5.31/Mcf on NYMEX, shrugging off a report by the US Energy Information Administration that the amount of natural gas in US underground storage fell to a record low last week with 2 weeks remaining in the traditional withdrawal season.
"The market opened steady and soon rallied to over $5.60(/Mcf) after the EIA storage report was released, but fell off just as quickly in afternoon trading. Speculators who bought early in the session were looking for follow-through, and when they didn't get it, they dumped (their positions) quickly," analysts at Enerfax Daily reported Friday. IEA reported 85 bcf of gas was withdrawn from US storage last week, leaving a record low of 636 bcf. That's down 1 tcf from a year ago and is 646 bcf below the 5-year average (OGJ Online, Mar. 20, 2003).
In London, futures prices for North Sea Brent oil fell sharply Thursday, testing support at $25/bbl on the International Petroleum Exchange. However, some participants said the price slump might be overdone in the face of historically low oil inventories in the US. A price recovery may be pending, they said. Prices are expected to remain volatile while the market awaits new developments in Iraq.
The May Brent contract lost $1.25 to $25.50/bbl Thursday. The April natural gas contract lost 2.9¢ to the equivalent of $2.76/Mcf on IPE.
The average price for OPEC's basket of seven benchmark crudes lost 61¢ to $26.51/bbl Thursday.
Ammonia market rebounds
Meanwhile, a significant decline in US natural gas prices in the last 3 weeks, combined with a recent spike in ammonia prices, prompted several US ammonia producers to announce plans to restart plants, said Robert S. Morris, analyst with BAS.
US Gulf Coast ammonia prices recently spiked to a 2-year high, "driven by strong fertilizer demand, given the recent start of spring planting season at a time when global grain inventories are significantly below normal, combined with reduced supply as a result of a rash of ammonia plant shut downs at the begging of this month," said Morris. "In fact, Gulf Coast ammonia prices have increased nearly 15% concurrent with a roughly 60% drop in domestic natural gas prices during the last 3 weeks."
As a result, he said, the US ammonia industry should be "operating north of 85% of capacity by the end of the month vs. 50% at the beginning of March, which should result in the return of approximately 500-600 MMcfd of recently 'backed out' natural gas demand."
Natural gas represents 80-90% of the cost of manufacturing anhydrous ammonia, the key ingredient of nearly all nitrogen fertilizers. When operating at full capacity, the ammonia industry represents 3% of total US demand for natural gas, Morris said.
Moreover, he reported, "This winter has been very dry throughout the Western US, with snow pack below normal in most areas. Consequently, the West is likely to have below normal hydroelectric generation capacity." That should result in as much as 1 bcfd of incremental US demand for natural gas this summer, said Morris.
Contact Sam Fletcher at [email protected]
