Sam Fletcher
Senior Writer
HOUSTON, Mar. 19 -- Energy futures prices plummeted Tuesday as optimistic traders, convinced that the US is but hours away from a short and successful war with Iraq that will leave world oil supplies undisturbed, continued to sell down their previous war premium on oil.
The average price for the Organization of Petroleum Exporting Countries' basket of seven benchmark crudes plunged by $2.11 to $27.69/bbl, back into the group's targeted range of $22-28/bbl for the first time since Dec. 16, 2002.
However, some analysts are skeptical of the rapid evaporation of the war premium, previously estimated at $5-8/bbl above price levels justified by normal market fundamentals of supply and demand. They claim that traders are not considering the uncertainties of war and may be taking down prices too soon.
Futures prices tumble
The April contract for benchmark US light, sweet crudes plunged by $3.26 to $31.67/bbl Tuesday on the New York Mercantile Exchange. It has fallen by $6.16/bbl over the last four trading sessions since closing Mar. 12 at $37.83/bbl.
The May position lost $2.49 to $30.05/bbl Tuesday on NYMEX. Unleaded gasoline for April delivery fell 6.52¢ to 96.19¢/gal. Heating oil for the same month dropped 5.79¢ to 85.78¢/gal.
Even the April natural gas contract lost 16.8¢ to $5.34/Mcf, despite US underground gas storage levels remaining at record low levels. "Longer-term concerns about near record-low storage inventories are likely to limit the downside (of gas futures prices) despite mild weather this week," said analysts Wednesday at Enerfax Daily. "Levels hover near all-time lows, with the spring injection season around the corner as well as an increased summer demand."
In London, the new May contract for North Sea Brent oil fell by $2.23 to $27.25/bbl after trading in a range of $26.40-28.80/bbl Tuesday on the International Petroleum Exchange. However, brokers said prices in that market probably would spike higher again with news of the start of military action in the Middle East.
The April natural gas contract gained 4.2¢ to the equivalent of $2.78/Mcf Tuesday on IPE.
Too far too fast?
"The market seems to have pushed far too far, far too fast, and on the basis of far too little hard information," said Paul Horsnell, J.P. Morgan Securities Inc., London, in a weekly report Wednesday. "Instead of positive news flow, prices have been moved by a speculative bet of staggering proportions," he said.
"Heavy selling of oil by hedge funds started some weeks ago" and has since intensified, Horsnell noted. "It seems to us that the hedge funds have perhaps got somewhat carried away in the scale of their bet and in their simplification of a highly complex political situation," he said.
"We are surprised at the numbers who (are) expecting to see a straightforward replay of 1991 (Desert Storm) and wished to get ahead of the curve, thus creating a stampede," Horsnell said. "We are particularly surprised at the number of traders who are still expecting a release of US strategic reserves at the start of the war. The administration has signaled repeatedly that any release will be reserved for cases where events have taken a distinct turn for the worse, and the one outcome that has been ruled out is a benign set of events on the ground, accompanied by a (Strategic Petroleum Reserve) release."
Meanwhile, officials at Boston-based Energy Security Analysis Inc. predicted Wednesday that oil prices will continue generally on a downward trend "absent one or more of the following developments:"
-- Iraqi's oil fields are torched and massive damage is done to its oil production infrastructure.
-- Conflict occurs between Turkish forces and the Kurds in northern Iraq.
-- The war spreads across Iraq's border into Kuwait.
-- Iraq uses chemical weapons against US-led forces in the field or against targets in Israel and Kuwait.
-- Terrorists attack various targets around the Persian Gulf.
If one or more of those events occur, said ESAI officials, "We would expect a price spike reflecting the market's uncertainty as to its significance or duration."
Meanwhile, they said, "The crude oil fundamentals are weakening significantly as OPEC output rises. Even though crude demand is currently high on the back of strong refining margins, we expect crude demand to taper off, especially with the end of the heating season, and as Asian refiners slow crude purchases late next month."
ESAI officials claim a slowdown in world demand for crude combined with high production among OPEC members above their official production quotas will produce a large surplus of oil, even without Iraq's production. Moreover, they said, "The recent price decline has taken much of the backwardation out of the market, paving the way for higher stocks in the US."
Supplies disrupted
Meanwhile, some oil supplies have already been disrupted, as the United Nations withdraws its personnel from Iraq, including officials overseeing the UN-administered oil-for-aid program under which Iraq has been exporting 1.7 million b/d (OGJ Online, Mar. 14, 2003). When military action begins, it likely will knock out the additional 300,000 b/d of oil that Iraq supplies to Jordan and Syria.
Moreover, the chairman and managing director of the Kuwait Oil Co. said all of Kuwait's northern oil fields would be shut down to protect workers if war breaks out in Iraq. In February, Al Abdali and Al Ratqa fields were shut in because of their proximity to the Iraqi border (OGJ Online, Mar. 4, 2003).
Despite government claims that Venezuela's oil sector is almost back to normal, independent analysts have said that country probably is still 1 million b/d short of the 2.8 million b/d that it was producing in November before 90% of the employees of Petroleos de Venezuela SA went on strike Dec. 2, 2002, in an attempt to oust Venezuelan President Hugo Chávez. He subsequently fired and called for criminal prosecution of 9,000 PDVSA managers and technicians for their participation in the strike. Although the general strike ended weeks ago in an apparent victory for Chávez, some PDVSA workers remain on strike.
OPEC ministers have said they will 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).
OPEC members are reported already to be maximizing production to offset the decline in Venezuela's oil output (OGJ Online, Mar. 4, 2003). Some analysts have said it might be difficult, if not impossible, for OPEC to make up losses for both Iraq and Venezuela.
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. On Jan. 12, ahead of that required schedule, OPEC ministers voted to increase their total oil production quota by 6.5% to 24.5 million b/d to reassure markets unsettled by a strike that disrupted oil exports from Venezuelan and fears of a possible war in Iraq (OGJ Online, Jan. 13, 2003). However, that decision included a production increase for Venezuela above its prestrike level.
Despite subsequent increased risk of a Middle East war, OPEC oil ministers at their Mar. 11 meeting in Vienna agreed to maintain current production (OGJ Online, Mar. 11, 2003). They promised to meet June 11 in Doha, Qatar, to reassess the situation.
Contact Sam Fletcher at [email protected].
