Sam Fletcher
Senior Writer
HOUSTON, Oct. 27 -- Energy futures prices generally retreated Friday in what some analysts described as profit taking following the economic up tick during the previous day's trade.
Oil and gasoline prices rose Thursday on the New York Mercantile Exchange upon reports ConocoPhillips shut a fluid catalytic cracking unit for unscheduled maintenance at its 295,000 b/d Alliance refinery in Belle Chasse, La. (OGJ Online, Oct. 24, 2003). However, traders were "not confident enough" to hold bullish positions over the weekend, said analysts Monday.
Cold weather support
"However, some support for both [oil and gas prices] could emerge this week with the National Weather Service calling for a strong cold front to push through the Midwest and Ohio Valley, bringing below-normal temperatures across the eastern two-thirds of the US that are expected to persist through the first week of November," said Robert S. Morris, Banc of America Securities LLC, New York, in a Monday report.
Nevertheless, he said, "While weather will likely be the primary driver of natural gas and, to some extent, crude oil prices near term, our view is still that oil prices will moderate next year and that, with a normal or mild winter, natural gas price expectations will have to be reined in."
Currency markets factor
Meanwhile, the US dollar is "coming under increasing scrutiny" as the currency-of-choice in international oil markets, following its recent depreciation against the euro and other currencies, said Wayne Andrews, an analyst in the Houston office of Raymond James & Associates Inc., St. Petersburg, Fla.
As a result, Andrews reported Monday, "Some leading producers have even openly contemplated adopting the euro as their currency of choice for pricing oil contracts. This prospect may lead to a major restructuring of both commodity and currency markets."
Since peaking in November 2000, the US dollar has fallen in value against "almost every other" major reserve currency, down 36% vs. the euro, 33% vs. the Swiss franc, 18% vs. the Canadian dollar, and 17% vs. the British pound.
"This means that refiners and other petroleum users outside the US are paying a lower 'real' price for oil over the past 3 years," said Andrews. "In US dollar terms, for example the price of West Texas Intermediate crude oil has fallen 14% over the past 3 years from $35.40/bbl to $30.46/bbl. When adjusted for the euro/dollar exchange rate, however, the price of oil to European consumers is down a whopping 39% since late 2000. This is the equivalent of European oil prices declining from $35.40/bbl to $21.56/bbl."
That hurts oil exporters, particularly members of the Organization of Petroleum Exporting Countries and Russia. "If all petrodollars were used to pay solely for [US] goods and services, this would not matter so much. But because much of OPEC and Russian trade is with the European Union, the weak dollar reduces the purchasing power of their all-important export earnings," Andrews said.
To make up for the lost buying power of the US dollar, he said, OPEC would have to raise its target-price band to $26-33/bbl from the $22/28/bbl level set in March 2000.
An alternative might be Russian President Vladimir Putin's recent suggestion that Russia might start pricing its oil in euros. "While he may have difficulty pressuring private sector oil firms to adopt the euro, the possibility of this happening did not even exist just a few years ago," Andrews observed.
"Wholesale adopting of the euro in the oil market worldwide could put the US dollar in a very precarious situation," he said. "This would make it more difficult to attract foreign capital, without which the US cannot keep running huge trade deficits. It could also lead to higher real interest rates if foreign demand for Treasury securities and corporate bonds suddenly dried up.
"And perhaps most importantly, it could start a vicious cycle in the currency markets—a downward 'death spiral' in which the dollar keeps on falling after it loses its central position in market after market," said Andrews.
However, he makes two major arguments against such a move in the near future. "The euro is still in its infancy and has, at best, a mixed track record. Its weakness in its first 2 years after its launch shows that it is hardly a 'safe haven' currency," Andrews said.
Moreover, he said, US officials "would strongly oppose any moves to dedollarize oil sales. While the US policy seems to be encouraging a devaluation of the dollar, they do not want a freefall in the dollar. Additionally, both Russia and Saudi Arabia are trying to cultivate better relations with the US for a variety of economic and geopolitical reasons."
Nevertheless, he said, "If the dollar keeps on falling—which seems likely, given the continuation of trade and budget deficits—oil prices should rise even further, everything else being equal."
Futures prices
The December contract for benchmark US light, sweet crudes lost 14¢ to $30.16/bbl Friday on NYMEX, while the January position retreated by 10¢ to $29.87/bbl. On the cash spot market, WTI at Cushing was down by 7¢ to $30.08/bbl.
Heating oil for November delivery declined by 0.77¢ to 82.11¢/gal Friday on NYMEX. However, unleaded gasoline for the same month increased by 0.14¢ to 83.71¢/gal. The November natural gas contract dropped 12.7¢ to $4.79/Mcf on NYMEX, in a late sell off Friday that "was a reflection of the weak cash market," said analysts Monday at Enerfax Daily.
Other sources reported the natural gas futures price declined "on technical factors" unrelated to market fundamentals, as previously placed orders to halt sales were triggered when the price dropped below $4.90/Mcf.
In London, the December contract for North Sea Brent oil slipped by 5¢ to $28.58/bbl on the International Petroleum Exchange. However, gas oil for November delivery gained $1.25 to $257.50/tonne. The November natural gas contract increased by 12.3¢ to the equivalent of $4.79/Mcf on IPE, effectively matching the near-month closing price on the NYMEX gas futures market.
The average price for OPEC's basket of seven crudes gained 13¢ to $28.23/bbl Friday, still outside the group's target-price band.
For the whole week, however, OPEC's basket price fell by $1.37 to an average $28.43/bbl. So far this year, OPEC's basket price has averaged $27.91/bbl, up from an average of $24.36/bbl for all of 2002.
Contact Sam Fletcher at [email protected]
