MARKET WATCHEnergy prices climb ahead of eventful week

March 6, 2006
Energy prices continued to climb with crude futures in New York rising to a 3-week high Mar. 3 as traders maneuvered to protect themselves against possible supply disruptions.

Sam Fletcher
Senior Writer

HOUSTON, Mar. 6 -- Energy prices continued to climb with crude futures in New York rising to a 3-week high Mar. 3 as traders maneuvered to protect themselves against possible supply disruptions over the weekend.

The International Atomic Energy Agency is scheduled to report Mar. 6 to the 35-member United Nations Security Council on the unsuccessful months-long effort to get Iran to suspend its nuclear research program, which many specialists fear is aimed at covertly creating nuclear weapons.

Energy markets fear the UN will impose sanctions on Iran, which could trigger a retaliatory reduction of crude exports by the second biggest producer in the Organization of Petroleum Exporting Countries. Iran earlier assured other OPEC ministers that it has no intention of reducing its production.

OPEC outlook
OPEC members are scheduled to meet Mar. 8 in Vienna to evaluate the crude market and the group's production quota of 28 million b/d set last June. Also on Mar. 8, the Energy Information Administration is expected to announce another increase in US crude inventories as peak winter demand winds down.

"We expect essentially the same outcome [at OPEC's upcoming meeting] as its January meeting; an acknowledgement that the market is adequately supplied but no change to its production quota due to the current high crude oil price and supply concerns, especially in Nigeria," said analysts at Friedman, Billings, Ramsey & Co. Inc., Arlington, Va.

"Any time it seems apparent that OPEC needs to reduce its output target because of potential oversupply, a sharp change to supply or demand occurs, this time in Nigeria where militants have caused the shutting in of 450,000 b/d of production, or 20% of the country's total," said Friedman, Billings, Ramsey analysts. "We expect crude oil prices to trade in a $55-65/bbl range in 2006, with potential upside if US gasoline supplies tighten this spring or additional supply disruptions occur. However, we are concerned that expectations for global crude oil demand growth in 2006 may be too high, which could place downward pressure on the commodity if forecasts are lowered."

Venezuelan Oil Minister Rafael Ramirez earlier called for a cut of 500,000-1 million b/d in OPEC's output, but no other OPEC members have indicated an interest in reducing production by the 10 affected members. Iraq is not included in the quota since it's still struggling to regain its prewar production levels.

"Iraq has not produced oil at a sustained rate above 3 million b/d since the first Gulf War. While the sanctions that had crippled its oil industry are long gone, three main obstacles must be overcome before production breaks through its current ceiling near 2 million b/d," said J. Marshall Adkins in the Houston office of Raymond James & Associates Inc.

"First, the level of sabotage and terrorist activity must decrease further. Second, prospective foreign investors must feel comfortable that their role in the oil industry's development will be respected by future Iraqi leaders. Finally, the general political and economic orientation of the new government must become clear," Adkins said. "All three of these preconditions may be met over time, but even under a best-case scenario the time it takes will be years, not months."

Energy prices
The April contract for benchmark US light, sweet crudes gained 31¢ to $63.67/bbl Mar. 3 on the New York Mercantile Exchange. The May contract increased by 29¢ to $65.36/bbl. On the US spot market, West Texas Intermediate at Cushing, Okla., was up by 31¢ to $63.68/bbl. Gasoline for April delivery jumped by 5.06¢ to $1.74/gal on NYMEX. Heating oil for the same month inched up by 0.79¢ to $1.81/gal.

The April natural gas contract gained 3¢ to $6.79/MMbtu, "rising for a third straight day as traders covered their shorts ahead of the weekend," said analysts at Enerfax Daily. "Prices have tumbled nearly 60% in the past 2½ months, and some short-sellers are anxious to take profits."

In London, the April IPE contract for North Sea Brent crude increased by 11¢ to $64.18/bbl. The March gas oil contract was up by $2 to $560.50/tonne.

The average price for OPEC's basket of 11 benchmark crudes increased by 98¢ to $59.08/bbl on Mar. 3. So far this year, OPEC's basket price has averaged $57.43/bbl, up from an average $50.64/bbl for all of 2005.

Contact Sam Fletcher at [email protected].