MARKET WATCHFutures markets mixed as gasoline gives up gain

Oct. 22, 2003
Energy futures markets were mixed Tuesday, with unleaded gasoline falling on the New York Mercantile Exchange, wiping out its gain from the previous session.

Sam Fletcher
Senior Writer

HOUSTON, Oct. 22 -- Energy futures markets were mixed Tuesday, with unleaded gasoline falling on the New York Mercantile Exchange, wiping out its gain from the previous session.

At the Institute of Petroleum in London, Secretary Gen. Alvaro Silva Calderon of the Organization of Petroleum Exporting Countries reiterated that consumers have no reason to fear oil shortages or over dependence on certain areas of the world for crude supplies. "These unjustified fears paradoxically can themselves make the oil market a less-secure place, by resulting in decisions and actions that contribute to distortions in the market place," he said.

OPEC outlook
Silva Calderon noted that world demand for oil is expected to increase to 107 million b/d in 2020 from 76 million b/d in 2000. "Our reference case shows that the use of natural gas will almost double in [that] period, and its share in the global energy mix will rise from 23% to 28%," he said.

He called for increased outside investment in OPEC member countries to help meet that demand. OPEC officials project that its members will need investments of nearly $100 billion by 2010 and $200 billion by 2020.

The latest issue of the OPEC Monthly Oil Market Report noted that oil inventories among member counties of the Organization for Economic Cooperation and Development have declined to 50 days of forward consumption from 60 days in 1993. "This does not mean that the absolute level of commercial oil inventories has been dramatically reduced over this period," the report said. "Instead, it points to a recently observed trend of refiners and oil companies operating with lower inventory levels in spite of rising demand."

As a result of the industry's "just-in-time" management of oil inventories, said OPEC officials, the "seasonal pattern observed [in world oil markets] before 1996 has disappeared, leaving the price of crude oil to correlate strongly with fluctuations in commercial stocks."

OPEC's decision to reduce its production quotas by a total of 900,000 b/d to 24.5 million b/d, effective Nov. 1, is "a reasoned response" to make room for the return of Iraqi oil to world markets, the report said.

'Crucial' period in Iraq
The next 6-12 months will be a crucial period for the recovery of Iraq's oil industry and for future US influence in the Middle East, said Herman Franssen, president of International Energy Associates Inc., also former senior economic advisor to Oman's energy minister and chief economist of the International Energy Agency.

Iraq faces a budget crisis if sabotage and looting keeps its oil production substantially below 2.5 million b/d in 2004, said Franssen at a recent oil industry meeting in Dubai. And if the US-led coalition fails to restore power, clean water, and other basic services to Iraq, it may lose forever its "battle for the hearts and minds" of Iraqis, he said.

The "worse-case scenario" for such failures, he said, would be that Iraq's oil production would remain volatile, the country would drift into civil war, and world oil prices would remain high.

"If, on the other hand, the occupation forces succeed in restoring security, achieve substantial progress in providing vital services to the Iraqi people, and revive oil production close to 2.5 million b/d, the outlook will be more positive and Iraqi oil income will cover much of the budgetary requirements," he said.

"Oil supply disruption in Iraq, both during and after the war, and the inability to restore production have caused global oil prices to remain robust, creating large currency reserves in many [other] OPEC countries while slowing down global economic recovery," said Franssen.

He said Iraq has the ability to return its oil production to 2.5 million b/d "sometime next year," increasing to 3.5 million b/d by 2005-06. "Beyond the middle of this decade, Iraq has the potential to increase its capacity to 6 million b/d or more, making it potentially the second-largest OPEC oil producer [behind Saudi Arabia and ahead of rival Iran]," Franssen said.

If a democratically elected Iraqi government were to take charge of that country no later than 2005, with a new constitution and laws regulating foreign investment and the oil sector, international oil companies would be ready to invest in Iraqi exploration and production on a large scale, he said.

Energy prices
Unleaded gasoline for November delivery fell by 0.99¢ to 84.88¢/gal Tuesday on NYMEX, wiping out its 0.93¢/gal fly up Monday in reaction to a weekend explosion in the Amuay refinery at Petróleos de Venezuela SA's 950,000 b/d Paraguana refining complex (CRP) in Venezuela. Heating oil for the same month gained 0.25¢ to 82.59¢/gal.

The November contract for benchmark US light, sweet crudes lost 17¢ to $30.18/bbl, while the December position retreated by 11¢ to $30.32/bbl. On the cash spot market, West Texas Intermediate at Cushing declined by 20¢ to $30.18/bbl Tuesday.

However, the November natural gas contract rebounded 10.3¢ to $4.88/Mcf on NYMEX, "driven by a firmer cash market ahead of colder forecasts this week and some technical buying after Monday's 5% dive," said analysts Wednesday at Enerfax Daily.

"The [gas] spot market bounded back from an 88¢[/Mcf], or 16%, loss in the prior six sessions," they reported, narrowing the spread between spot and futures prices to 25-30¢/Mcf from 50¢/Mcf Monday. That narrower spread "could take some of the pressure off the NYMEX [near-month contract] ahead of its expiration on Oct. 29," they said.

In London, the December contract for North Sea Brent oil inched up by 1¢ to $28.63/bbl Tuesday on the International Petroleum Exchange. Gas oil for November delivery gained $3 to $257/tonne. The November natural gas contract continued to escalate, up by 7.3¢ to the equivalent of $4.57/Mcf Tuesday on IPE.

The average price for OPEC's basket of seven benchmark crudes remained unchanged at $28.40/bbl Tuesday.

Contact Sam Fletcher at [email protected]