MARKET WATCHIncreased terrorism and lower inventories push up oil futures prices

May 19, 2003
Low US oil inventories and escalating terrorism helped push up futures prices for crude and petroleum products Friday.

Sam Fletcher
Senior Writer

HOUSTON, May 19 -- Low US oil inventories and escalating terrorism helped push up futures prices for crude and petroleum products Friday.

Following terrorist suicide attacks in Saudi Arabia last week and bombings of 19 retail gasoline outlets branded by the Royal Dutch/Shell Group and Caltex Corp. in Karachi, Pakistan, traders expressed fears of possibly more terrorist attacks in various parts of the world.

OPEC production
Meanwhile, Algeria's Energy and Mines Minister Chakib Khelil reiterated that members of the Organization of Petroleum Exporting Countries might opt for additional production cuts at their meeting next month in Doha, Qatar. He cited the pending return of Iraq oil production to world markets and a seasonal decline in world demand.

Last week's surge in oil prices was prodded in part by indications that Saudi Arabia plans to reduce its output, effective June 1, in accordance with OPEC's new production quota, said Robert S. Morris, an analyst at Banc of America Securities, New York. Morris said there also are signs that Iraq won't resume its prewar level of oil production as quickly as many had assumed.

The US Energy Information Administration cited reports by Thamir Ghadban, the new head of Iraq's oil sector, that Iraq is now producing 250,000 b/d of crude, down from more than 2 million b/d prior to the war. British engineers also reported that Iraq's Basra refinery could return to full capacity by May 27, if a pipeline from Baghdad to Basra is operational by that time.

Still, the Centre for Global Energy Studies in London reported Monday that the 10 active OPEC members, minus Iraq, will need to cut their combined production by nearly 3 million b/d from some 27 million b/d "if they are to keep oil prices close to their target level" during the last half of this year.

Analysts at the center said, "Over half of this cut has already been made on paper, but it is far from certain whether all members of OPEC will abide by their production quotas in June, far less whether they will be prepared to make further reductions a month later." Because of current low stocks of both crude and petroleum products among major oil-consuming countries, they said, the world can absorb 26.4 million b/d of OPEC oil through the second quarter of this year. However, they said, "The picture will look very different" in the third quarter. At their June meeting, analysts said, OPEC members consequently will have to reduce their aggregate production to 24 million b/d, effective July 1.

US market prices
The June contract for benchmark US light, sweet crudes gained 40¢ to $29.14/bbl Friday on the New York Mercantile Exchange, while the July contract was up 34¢ to $28.75/bbl. Unleaded gasoline for June delivery jumped by 1.17¢ to 87.9¢/gal. Heating oil for the same month increased by 0.52¢ to 75.56¢/gal.

The June natural gas contract dipped by 0.9¢ to $6.12/Mcf Friday on NYMEX. "Weakened cash trading ahead of the weekend sent prices downward to start the session, but the market rose along with crude oil" late in the day, analysts at Enerfax Daily reported Monday.

Higher crude prices generally have added momentum to natural gas prices, "which have surged 16% over the past 2 weeks as concerns mount regarding the ability to refill (US gas) storage by next winter," said Morris.

"The upward gas price pressure for (last) week again reflects the market's growing realization that the gas storage deficit has been roughly the same size for the last 12 weeks, about 350 bcf, plus or minus 40 bcf. This means that the pace of (gas) demand destruction will have to increase if minimum November storage levels are to be achieved," said Stephen Smith, president of Stephen Smith Energy Associates, Natchez, Miss.

It will require average prices of $5-7/Mcf at Henry Hub to "'bid away' sufficient spring and summer gas demand," Smith said. "A summer as hot as last year would likely drive gas prices to the upper half of this range—and for brief periods, possibly beyond."

Gas production
Meanwhile, a survey by Raymond James & Associates Inc., St. Petersburg, Fla., of 50 of the biggest US producers indicates that US gas production during the first quarter of this year increased from the fourth quarter of 2002, "breaking the trend of lower production in place for the previous 6 consecutive quarters," said J. Marshall Adkins, an analysts in the Raymond James Houston office. It also appears that first quarter production declined "only 2.3%" from the same period a year ago vs. a decrease of more than 6% "in late 2002."

However, Adkins said the rise in first-quarter production was the result of "one-time events," primarily the return of production in the Gulf of Mexico that was shut in by storms during the fourth quarter of 2002. "We estimate that these storms knocked out about 2%, or 1 bcfd, of US gas production for the fourth quarter," he said. The Canyon Express system in the gulf continued to ramp up production through the first quarter and added about 500 MMcfd of additional production compared with a year ago, Adkins said.

As the price for natural gas has risen, processing companies have stopped stripping out natural gas liquids to increase gas volumes and btu content. That probably increased gas production by 500 MMcfd for the quarter, or 1 bcfd compared with a year ago, Adkins said. "Much lower" gas storage levels and pipeline pressures also allowed more gas to flow into the system in 2003, he said.

"Even though this first quarter gas production data hint at an improving US gas supply situation, we remain more convinced than ever that the US is facing a supply-driven chronic gas shortage scenario for the next several years," Adkins reported Monday.

With gas supplies still dwindling despite an up tick in drilling activity, he said, "The only solution is a market-induced 'rationing' of available natural gas through higher prices." As a result, Raymond James increased its 2004 gas price forecast to $6/Mcf from $5/Mcf previously.

Other prices
In London, the June contract for North Sea Brent oil gained 38¢ to $26.10/bbl Friday on the International Petroleum Exchange, after Shell declared force majeure on disruption of crude shipments out of its Forcados terminal in Nigeria. While that stimulated "fairly active" buying in that market, brokers said market fundamentals likely aren't strong enough to sustain prices above $26/bbl on IPE.

The June natural gas contract jumped by 5.8¢ to the equivalent of $2.77/Mcf on IPE.

The average price for OPEC's basket of seven benchmark crudes inched up 3¢ to $26.24/bbl Friday.

For last week as a whole, OPEC's basket price averaged $25.55/bbl, up from an average $24.01/bbl the previous week. So far this year, the OPEC basket has averaged $28.57/bbl, compared with an average of $24.36/bbl for all of 2002.

Contact Sam Fletcher at [email protected]