By OGJ editors
HOUSTON, July 12 -- Energy prices fell Friday as traders recovered from a knee-jerk jump above $40/bbl for crude in the previous session after the US Homeland Security office warned that terrorists may be planning to disrupt US presidential elections (OGJ Online, July 9, 2004).
Still, worldwide terrorism, dramatically increased oil demand, and much more expensive natural gas will prevent oil and gas prices from ever returning to the low levels of past years, said energy specialists at the East-West Center in Honolulu.
East-West outlook
Fereidun Fesharaki, a senior research fellow at the East-West Center and a leading expert on Asia-Pacific oil and energy, said prices were expected to drop more after the Iraq war ended, but a number of developments have prevented that. Worldwide terrorism has grown in Iraq and beyond, with oil prices now reflecting a "terrorism premium" of $3-5/bbl.
"Is the handover of Iraqi sovereignty going to reduce terrorism in Iraq?" Fesharaki asked. "God put oil in an unstable place. Geography cannot be changed by politics."
Hedge funds unloading 140 million bbl of open interest in the oil futures market will likely bring down the price of oil by $6-8/bbl, Fesharaki said, but overall, "prices will not go down to the levels of before."
Other factors that will keep oil and gas prices high:
-- The price of natural gas, competing with fuel oil for use in the electricity sector, has tripled after remaining stable for 30 years. The US has a shortage of natural gas at a time of increased demand, a situation that Fesharaki said has brought permanent changes.
-- Environmental standards will also keep US gas prices high, Fesharaki said.
-- Revived global economies will mean an increase of more than 100% in incremental oil demand this year over 2003, the biggest annual growth in a decade. The US and China will make up more than half of that growth.
Kang Wu, an East-West Center research fellow in the Energy group, said China's 10% growth in energy demand paralleled a 10% growth in gross domestic product in 2003. China accounted for 30% of worldwide growth in energy demand last year, and the US-Asia Pacific region totaled more than half.
Japan's growth in demand in 2003 was abnormally high because safety concerns shut down nuclear plants, said Tomoko Hosoe, an East-West Center professional associate who also specializes in oil and energy issues. With an aging population and a growing services industry that requires less energy, Japan's oil demand will start to decline after 2005.
Meanwhile, in an effort to play down French concerns over high oil prices, Jean-Louis Schilansky, delegate general of France's petroleum trade group, Union Française des Industries Pétrolières (UFIP), insisted that "while it is true that crude prices have not ceased to increase since 2001, with an average price of $33.67/bbl of Brent in the first 2004 half, it is a far cry from the $80/bbl (in constant dollars) of the second oil crisis in 1979."
This is because of the high value of the euro against the dollar, he explained, which compensated for the price hike. Over the last 4 years, the euro increased by 34% and the average conversion rate was 1.23 euro for $1 in 2000. Over the same period the price of North Sea Brent crude rose by "only" 18%.
Schilansky admitted, however, that the market is undergoing tensions generated by the Middle East, political and social crises in Venezuela and Nigeria, and the threat to Russia's Yukos (OGJ Online, July 6, 2004) which supplies about 1.5% of world crude.
Friday's prices
The August contract for benchmark US light, sweet crudes lost 37¢ to $39.96/bbl Friday on the New York Mercantile Exchange, while the September contract was down by 39¢ to $40.14/bbl. West Texas Intermediate at Cushing, Okla., fell 35¢ to $39.98/bbl on the US spot market.
Heating oil for August delivery fell by 2.12¢ to finish at $1.0809/gal Friday on NYMEX, while gasoline for the same month dipped by 0.63¢ to $1.3215/gal. Nonetheless, the tight inventory situation with refineries working at full capacity made traders nervous about the availability of gasoline in case there was a problem in a refinery forcing it shut down.
Analysts noted that the strong demand for gasoline keeps rising, and traders were nervous about the possibilities of crude because of uncertainty in Iraq. Despite efforts by the Organization of Petroleum Exporting Countries to increase production, international stocks of crude have not moved up significantly, analysts reported.
The August natural gas contract dropped by 4.4¢ to $6.14/Mcf Friday on NYMEX.
In London, the August contract for North Sea Brent crude lost 72¢ to $37.05/bbl on the International Petroleum Exchange. Gas oil for July declined by 75¢ to $345.50/tonne.
The August natural gas contract held steady at the equivalent of $4.01/Mcf on IPE.
The average price for OPEC's basket of seven benchmark crudes gained 14¢ to $36.05/bbl Friday. So far this year, OPEC's basket price has averaged $32.69/bbl.
