MARKET WATCHEnergy prices bounce higher

Oct. 12, 2005
Commodity prices bounced higher Oct. 11 on separate predictions by the US Federal Reserve System and the Paris-based International Energy Agency of a 2006 rebound in demand for fuel.

Sam Fletcher
Senior Writer

HOUSTON, Oct. 12 -- Commodity prices bounced higher Oct. 11 on separate predictions by the US Federal Reserve System and the Paris-based International Energy Agency of a 2006 rebound in demand for fuel.

In its monthly review, IEA reduced its global oil demand growth forecast by 80,000 b/d from the previous month to 1.26 million b/d for average demand in 2005 of 83.4 million b/d, primarily because of market disruptions caused by Hurricanes Katrina and Rita. However, it said demand would rebound in 2006 by 1.75 million b/d.

Production declines
IEA also lowered its 2005 forecast for production growth outside the Organization of Petroleum Exporting Countries by 335,000 b/d to only 165,000 b/d and by 400,000 b/d to 1.3 million b/d in 2006.

"This suggests a much tighter supply-demand situation with increased dependence on OPEC (already producing near capacity), which keeps oil prices high," said analysts at Friedman, Billings, Ramsey & Co. Inc. in Arlington, Va.

"The 10-year historical average annual non-OPEC supply growth rate is 870,000 b/d (1.9%), and while 2006 should benefit from an expected recovery of Gulf [of Mexico] operations, the vast majority of the growth is expected to come from the Former Soviet Union, Africa, and Canada, where operational issues have recently hampered production," they said.

Commodity traders have worried recently about destruction of energy demand by Hurricanes Katrina and Rita, which hit the US Gulf Coast in late summer within weeks of each other. "Although the exact extent of demand destruction is very difficult to quantify, the IEA reports that on a worldwide basis, approximately 290,000 b/d of oil demand will remain offline this month, which has improved a dramatic 70% (or 690,000 b/d) from 980,000 b/d of lost demand during the peak of the hurricane squeeze," said analysts in the Houston office of Raymond James & Associates Inc.

The US Minerals Management Service said Oct. 11 that crews still have not returned to 266 platforms and 4 drilling rigs in the Gulf of Mexico. In federal waters of the gulf, it said 1.1 million b/d, or 70.8%, of crude and 6 bcfd, or 60.4%, of natural gas production are still shut in. Cumulative gulf production lost since Aug. 26 now totals 54.6 million bbl of crude and 271.7 bcf of natural gas. That's equivalent to nearly 10% of the crude and 7.4% of the natural gas produced annually in those waters.

Energy prices
The November contract for benchmark US light, sweet crudes jumped by $1.73 to $63.53/bbl Oct. 11 on the New York Mercantile Exchange. The December position advanced by $1.48 to $63.05/bbl. On the US spot market, West Texas Intermediate at Cushing, Okla., was up by $1.73 to $63.54/bbl. Heating oil for November delivery gained 4.61¢ to $2.02/gal on NYMEX. Gasoline for the same month increased by 3.26¢ to $1.83/gal.

The November natural gas contract escalated by 54.4¢ to $13.52/MMbtu, driven by strong crude prices and short covering of excess sales contracts after four consecutive losing sessions, said analysts at Enerfax Daily. That market also was boosted by the MMS report of only a modest gain in supplies from the Gulf of Mexico, they said.

In London, the November contract for North Sea Brent crude gained $1.30 to $60.08/bbl on the International Petroleum Exchange. Gas oil for October increased by $11 to $604.75/tonne.

The average price for OPEC's basket of 11 benchmark crudes gained 25¢ to a corrected price of $53.97/bbl Oct. 10, then increased to $54.47/bbl Oct. 11.

Contact Sam Fletcher at [email protected].