Sam Fletcher
Senior Writer
HOUSTON, Sept. 1 -- Crude futures prices continued to inch up Aug. 31 as Iran defied the United Nations' deadline to stop uranium enrichment and as Nigerian oil workers moved a day closer to their proposed 3-day strike scheduled for Sept. 13.
Iran's snubbing of demands from the UN Security Council provoked no major reaction in energy markets "as the response (or lack thereof) was already expected and factored into prices," said analysts in the Houston office of Raymond James & Associates Inc. "However, crude may rise if the UN proceeds with sanctions."
US and other officials said no action is contemplated pending a diplomatic meeting next week with the head of Iran's nuclear program in yet another attempt to work out a compromise.
Meanwhile, Nigerian oil workers plan a "warning" strike to protest inadequate government security for oil and gas facilities in the Niger Delta. Rebels killed a local employee of a Royal Dutch Shell PLC subsidiary in the latest attack.
In other news, BP PLC officials are optimistic the Prudhoe Bay oil field may return to full production earlier than expected. They said a portion of the corroded transit pipeline may be useable temporarily and other sections of the 16 miles of pipeline can be bypassed. Prudhoe Bay production was cut in half to 200,000 b/d after spills in March and August revealed extensive internal corrosion of the pipeline connecting it to the trans-Alaska line (OGJ Online, Aug. 30, 2006).
Natural gas outlook
For the first time in 6 weeks, the front-month natural gas futures contract fell below $6/MMbtu in early trading Sept. 1 on the New York Mercantile Exchange despite a lower-than-expected injection of 48 bcf of gas into US storage during the week ended Aug. 25. On Aug. 31, the October natural gas contract dropped 24.2¢ to $6.05/MMbtu. "The downside is a result of a combination of [Tropical Storm] Ernesto no longer posing an imminent threat to the Gulf of Mexico and forecasts of more moderate weather. Furthermore, next week's injection number is historically a large injection due to Labor Day [US holiday], which causes decreased industrial demand," said Raymond James analysts.
Analysts at Enerfax Daily said, "Natural gas futures prices tumbled 26% in August, the biggest monthly drop since February. Prices are now 48% lower than a year ago."
Based on current storage balances, Raymond James analysts calculate an injection pace of 7.39 bcfd will get US storage to "a very solid comfort level" of 3.4 tcf by Nov. 1, the start of the winter heating season. "This could be considered bearish when compared with the 8.9 bcfd actual injection rate last year and the 9.38 bcfd 5-year average. However, as is highly evident in the 4 previous weeks (injections averaged 33 bcf versus 53 bcf in the comparable 2005 period), natural gas consumption in the summer months has increased in recent years due to new gas-fueled generation capacity, while US gas production capacity has decreased. Moreover, peaking power generation facilities will burn natural gas this summer as (unlike the past few summers) gas is substantially less expensive than No. 2 oil," Raymond James analysts said.
However, "a ramp-up in Canada's gas-intensive oil sands industry, specifically in the province of Alberta, has significant implications for US gas imports," said Ronald J. Barone, UBS Securities LLC, New York. He cited a study by the Canadian Energy Research Institute that estimated 17.3 tcf of gas would be required to produce oil sand reserves in Alberta over the next 15 years. That's "close to half of the 39.4 tcf of established reserves in Alberta," said Barone in a Sept. 1 report.
"As Canada's oil sands industry shifts into higher gears, imports to the US should continue to experience a marked decline. The US Energy Information Admnistration, which is projecting a 1.9% annual growth rate in Canadian domestic gas consumption, predicts that by 2010 Canada's falling exports will be overtaken by LNG as the main source of US gas imports. Put into perspective, as recently as 2003 Canada supplied almost 90% of US net natural gas imports," he said.
Meanwhile, Barone said, "The warm weather trend came to an end this week as cooler air settled into several regions of the country, including the Northeast and Central US. Heading into the weekend, the cooling trend is expected to persist as Ernesto makes its way up the eastern US seaboard."
Energy prices
The October contract for benchmark US light, sweet crudes gained 23¢ to $70.26/bbl Aug. 31 on NYMEX. The November contract pushed up 38¢ to $71.47/bbl. On the US spot market, West Texas Intermediate at Cushing, Okla., was up by 23¢ to $70.27/bbl. Heating oil for September delivery inched up by 0.46¢ but closed virtually unchanged at $1.95/gal on NYMEX. However, unleaded gasoline for the same month dropped 5.15¢ to $1.75/gal.
"The gasoline crack has collapsed . . . while heating oil has held some relative ground," said Olivier Jakob, managing director of Petromatrix GMBH, Zug, Switzerland. "The spring rally [in crude prices] had been on expectations of strong product demand. The market has now lost the support of the products, and this outbreak in the relative values should be taken as a serious risk warning for the sustainability of crude oil above $70/bbl. If gasoline does not succeed in regaining some ground (in August 2006 the gasoline crack lost $14/bbl while it gained $14/bbl in August 2005) the current crude oil flat price will not have the necessary fuel for a further rally. But September is the end of the gasoline season, and the gasoline crack lost ground in September 5 years of the last 6," he said.
In London, the October IPE contract for North Sea Brent crude increased by 7¢ to $70.25/bbl. The September gas oil contract gained $6.50 to $634.75/tonne, wiping out the previous session's loss.
The average price for the Organization of Petroleum Exporting Countries' basket of 11 benchmark crudes recovered 18¢ to $65.18/bbl on Aug. 31.
Contact Sam Fletcher at [email protected].
