MARKET WATCHEnergy futures prices continue to rally in unsettled markets

July 21, 2003
Energy futures prices continued to rally Friday, led by a hike in gasoline prices on reports that a Louisiana refinery shut down last week for unscheduled maintenance.

Sam Fletcher
Senior Writer

HOUSTON, July 21 -- Energy futures prices continued to rally Friday, led by a hike in gasoline prices on reports that a Louisiana refinery shut down last week for unscheduled maintenance.

Unleaded gasoline for August delivery jumped by 3.05¢ to 92.13¢/gal Friday on the New York Mercantile Exchange. That came just 2 days after the same gasoline contract had plummeted by 4.21¢ to 89.02¢/gal on reports of a 3.9 million bbl build in US gasoline inventories, emphasizing the market's current schizophrenic nature.

Heating oil for the same month was up 0.44¢ to 80.12¢/gal Friday. The August contract for benchmark US light, sweet crudes increased 55¢ to $31.96/bbl, while the September position advanced by 31¢ to $31.03/bbl. However, natural gas for August delivery slipped by 2.8¢ to $5.02/Mcf on NYMEX.

The natural gas futures market declined on reports of milder weather this week, "despite a firmer cash market and some early short-covering (buying to cover contracted delivery commitments) ahead of the weekend," energy analysts reported Monday at Enerfax Daily. "The market could see a lower (US underground natural gas) storage injection this week because of Hurricane Claudette, as storm-related production cuts will likely trim injections," they said.

The first hurricane of the 2003 Atlantic season came ashore in South Texas on July 15 and quickly dissipated. "Although Claudette missed the bulk of Gulf of Mexico oil and gas operations off Louisiana, most operators shut in at least some production for 1-4 days," said Robert S. Morris, Banc of America Securities LLC, New York, in a report issued Monday. "Overall, we estimate that roughly 10 bcf of natural gas production was 'lost' due to Claudette, all of which should be reflected in this week's storage injection figure," he said.

In London, the September contract for North Sea Brent oil gained 31¢ to $28.93/bbl Friday on the International Petroleum Exchange, in a largely technical recovery from losses earlier in the week. Brokers said that market appeared oversold at just above $28/bbl, considering the continued low level of inventories of crude and petroleum products in key consuming countries, including the US. Prices are likely to remain volatile for the next several weeks, they said.

Meanwhile, the August natural gas contract increased by 1.3¢ to the equivalent of $2.69/Mcf on IPE.

Price forecast increased
Already among the most bullish in predicting higher oil prices, Raymond James & Associates Inc., St. Petersburg, Fla., said Monday it hasn't been "bullish enough" and hiked its forecast to an average $30.50/bbl for 2003 from $29/bbl previously. However, it maintained its 2004 outlook at a "conservative" $26/bbl.

"Even though we are higher (by about $2/bbl) than most analysts, we feel that our oil price estimates remain conservative (especially our 2004 estimate), given that they are still below the current NYMEX futures strip," said J. Marshall Adkins, an analyst in Raymond James's Houston office.

"Wall Street's doom-and-gloom forecasts for lower natural gas and crude oil prices have recently helped drive a somewhat bearish tone in the energy markets," he noted. "With oil prices hovering around the $30/bbl mark, one of the big fears has been that West Texas Intermediate prices will move back down to $25/bbl or even $20/bbl by some estimates, bringing natural gas and the energy markets to their knees."

However, Adkins said, "Total US petroleum inventories remain at their lowest seasonal levels in over a decade." Despite earlier market fears that members of the Organization of Petroleum Exporting Countries would overproduce, he said, "The cuts made in April, combined with still muted output from Iraq, have kept inventory builds at a minimum. In fact, US oil demand growth from gas-to-oil fuel-switching and weekly (US Strategic Petroleum Reserves) additions have recently put additional downward pressure on (commercial) inventory levels."

He said, "This has kept support for oil prices in the $30+/bbl range for the past 3 months, a trend we see continuing through the rest of the year."

OPEC support
Wall Street "has consistently underestimated oil prices because (it has) underestimated OPEC's ability to adjust oil production and maintain stable oil prices," Adkins said. "Since 1999, OPEC's production performance has been nearly flawless, as crude oil prices have held right around the midpoint of its targeted basket price range of $22-28/bbl. In fact, since OPEC's . . . production cut in April 1999, US oil prices have averaged just under $27/bbl, strikingly close to the midpoint of its targeted range."

Adkins said, "The most recent example of OPEC's resolve was the 2 million b/d of oil production cuts made in late April of this year, to begin June 1. Sure enough, June production data indicates that OPEC did in fact begin to make good on their promise as oil production (excluding Iraq) dropped by over 800,000 b/d. Furthermore, the significant decline in tanker rates over the past month and a half also supports the fact that OPEC continues to rein in production levels.

"This means that oil inventory levels are likely to remain at the low end of the historical range for at least the next 6 months," he said. "More importantly, assuming the signs of a supply-demand imbalance surface next year (as we project), we expect OPEC to cut oil production yet again to keep oil prices within its targeted range."

OPEC prices
The average price for OPEC's basket of seven benchmark crudes gained 30¢ to $28.23/bbl Friday. For last week as a whole, however, OPEC's basket price averaged $27.93/bbl, up 67¢ from the previous week's average.

So far this year, OPEC's basket price has averaged $28.03/bbl, including averages of $30.55/bbl in the first quarter and $25.85/bbl in the second. That compares with an average $24.36/bbl for all of 2002.

Contact Sam Fletcher at [email protected]