Market watch: Oil futures prices rebound with Middle East military build-up

March 5, 2003
Oil futures prices rebounded with more US troops being ordered to the Middle East and the reassertion by federal officials that the US would act against Iraq without a new United Nations resolution.

Sam Fletcher
Senior Writer

HOUSTON, Mar. 5 -- Oil futures prices rebounded Tuesday with more US troops being ordered to the Middle East and the reassertion by federal officials that the US would act against Iraq without a new United Nations resolution, if necessary.

The April contract for benchmark US light, sweet crudes jumped by $1.01 to $36.89/bbl Tuesday on the New York Mercantile Exchange, while the May position advanced by 67¢ to $34.91/bbl. Both had retreated in the previous three NYMEX trading sessions after the April contract on Feb. 27 briefly touched $39.99/bbl, the highest price level since October 1990 when oil futures hit a record $41.15/bbl after Iraq invaded Kuwait.

"Oil prices continue to gain support from near 28-year low US crude oil (and) product inventories, which have also been impacted by the colder-than-normal winter, along with the prospect of war with Iraq," said Robert Morris in a report issued Tuesday by Salomon Smith Barney Inc., New York.

However, he said, oil prices will likely subside "with the elimination of the current 'war premium' and the emergence of crude and product stocks that have been 'hoarded' in anticipation of a war with Iraq, at the same time that OPEC is likely to seek to curtail output."

Meanwhile, Morris said, the "psychology" of a potential sharp drop in oil prices later this year is likely to influence adversely the share performances of publicly traded producers and oil field service companies.

Other futures prices
Unleaded gasoline for April delivery shot up 1.74¢ to $1.11/gal Tuesday on NYMEX. Heating oil for the same month escalated by 1.26¢ to $1.05/gal. However, the April natural gas contract slipped 12.1¢ to $7.04/Mcf on new forecasts of moderate US weather.

"The market opened slightly lower but quickly regained momentum and hit the high of the day of $7.55(/Mcf) about mid-morning on the strength of a soaring crude oil market. The rally died about noon, and prices dropped precipitously by mid-afternoon on a milder weather forecast," analysts reported Wednesday at Enerfax Daily. "The volatility in the front month contract is so great," they said, "many traders are opting to trade the back months to help alleviate those concerns."

Salomon Smith Barney on Tuesday raised its full-year 2003 composite spot natural gas price forecast to $5.60/MMbtu, from $4.10/MMbtu previously, "based on what appears will now be around a 6% colder-than-normal overall winter," with natural gas storage levels "likely to approach or perhaps be below 650 bcf" by the end of March.

That gas price forecast is based on the assumption that spot prices for West Texas Intermediate crude will average $34.50/bbl through the first quarter of this year.

"Given the continued strength of oil prices and much colder-than-normal temperatures in February and which are expected to persist through mid-March, we believe that the full-year (Wall) Street consensus composite spot natural gas price—currently below $4.25/MMbtu—is likely to continue to rise sharply," Morris reported. "At the same time, it would appear, in our opinion, that the full-year Street consensus WTI spot crude oil price forecast of just over $24.20/bbl might also be too low."

In London, the April contract for North Sea Brent oil gained 61¢ to $33.09/bbl Tuesday on the International Petroleum Exchange, among expectations of additional bullish reports this week of low US inventories of oil and petroleum products. Meanwhile, brokers said, oil futures prices are unlikely to drop below $30/bbl in that market as long as expectations remain strong for a military conflict in the Middle East.

The April natural gas contract increased by 3.7¢ Tuesday to the equivalent of $2.81/Mcf on IPE.

The average price for the Organization of Petroleum Exporting Countries' basket of seven benchmark crudes gained 49¢ to $32.12/bbl Tuesday.

Contact Sam Fletcher at [email protected]