MARKET WATCHIPE energy prices dip, but analysts remain optimistic

Jan. 5, 2004
Energy futures prices dipped Friday on the International Petroleum Exchange in London in reaction to government and industry reports Wednesday of slight increases in US inventories of distillate fuels during the week ended Dec. 26.

Sam Fletcher
Senior Writer

HOUSTON, Jan. 5 -- Energy futures prices dipped Friday on the International Petroleum Exchange in London in reaction to government and industry reports Wednesday of slight increases in US inventories of distillate fuels during the week ended Dec. 26.

However, two executives at Merrill Lynch Global Securities Research & Economics Group, New York, said Monday that "the energy complex looks to open sharply higher across the board in this first trading day of 2004," based on market factors.

Market pressures
Michael Rothman, first vice-president and senior energy market specialist, and Steven A. Pfeifer, fist vice-president and senior integrated oils analyst at Merrill Lynch, forecast "pressure on physical heating oil and gasoline supplies, owing to a confluence of refining issues. With crude oil stocks having fallen below the 270 million [bbl] 'minimum operating level,' prospects emerged for US refiners to curtail operating rates, which translates directly into a reduction of product output."

They said, "Current crude runs for [US] refineries stand about 500,000 b/d above their typical level for the start of a year. Normally, rates fall to about 14.2 million b/d by the start of February, which would mean a 2 million b/d cut in runs over the next 4 weeks." That would translate into reductions of 1 million b/d of gasoline and 450,000 b/d of heating oil and diesel said the Merrill Lynch executives.

"On top of this, we have the forced elimination of [clean fuel additive] methyl tertiary butyl ether (MTBE) from certain gasoline markets, which boils down to lower gasoline yields," they said.

The analysts also cited "updated weather guidance calling for a return of wintry temperatures starting this week," which would likely impact markets for natural gas and heating oil.

US inventories
The American Petroleum Institute reported US crude inventories plunged by 8.3 million bbl to 267.5 million bbl during the week ended Dec. 26 (OGJ Online, Jan. 2, 2004). US distillates were up by only 78,000 bbl to 130.8 million bbl during that period, API said, while US gasoline stocks jumped by 1.6 million bbl to 202.8 million bbl.

Earlier, the US Energy Information Administration reported commercial US crude inventories fell by 3.8 million bbl to 270.7 million bbl in the week ended Dec. 26 (OGJ Online, Dec. 31, 2003). EIA said US distillate stocks increased by 700,000 bbl to 129.1 million bbl in that period, while US gasoline stocks increased by 600,000 bbl to 203.6 million bbl.

The latest EIA data "show a further erosion of crude oil inventory cover but a more significant lessening in oil product market tightness," said Paul Horsnell, head of energy research at Barclays Capital Inc., London, in a weekly report Friday.

Energy prices
The February contract for North Sea Brent oil fell by 82¢ to $29.35/bbl Friday on IPE in London. Gas oil for January delivery dipped by 25¢ to $271.75/tonne, and the February natural gas contract lost 11.9¢ to $5.77/Mcf on IPE.

The average price for Organization of Petroleum Exporting Countries' basket of seven benchmark crudes retreated to $29.41/bbl Friday, down from $29.87/bbl on Dec. 31 and $29.73/bbl on Dec. 30.

For all of last week, however, the OPEC basket averaged $29.53/bbl, down by 21¢ from the previous week's average price. OPEC's basket price averaged $28.10/bbl for all of 2003, up from an annual average price of $24.36/bbl in 2002.

"It is certainly no exaggeration to say that 2003 was an excellent year for the energy industry's fundamentals—one of the best ever," said J. Marshall Adkins, an analyst in the Houston office of Raymond James & Associates Inc., St. Petersburg, Fla.

"The beginning of a global economic recovery created a favorable demand environment, while crude oil and natural gas supplies were flat to lower. This led to a substantial—and, we believe, fully sustainable—upward move in commodity prices, which helped both E&P and service companies turn in a solid annual performance," Adkins reported Monday.

"For 2004, we are forecasting a broad continuation of last year's commodity price levels," he said. "Additionally, investors' growing recognition of commodity price sustainability supports the proposition that 2004 will be an even better year for energy investors."

Contact Sam Fletcher at [email protected].