Market watch: Oil prices rebound as Iraq halts exports

Oil futures prices rebounded Monday, as Iraq again halted its oil exports to protest UN adjustments of its oil-for-food program. However, other members of the Organization of Petroleum Exporting Countries, meeting in Vienna, said they would make up any temporary oil supply curtailments.

By the OGJ Online Staff

HOUSTON, June 5 -- Oil futures prices rebounded Monday, as Iraq again halted its oil exports to protest the UN decision to extend its oil-for-food program for only 1 month instead of the regular 6.

That stimulated international markets to recoup some of Friday's decline in oil prices that resulted from a selloff by profit-takers.

However, Obaid Bin Saif Al-Nasseri, oil minister of the United Arab Emirates, said other members of the Organization of Petroleum Exporting Countries are ready to make up any supply shortages as a result of Iraq's embargo. OPEC members were meeting Tuesday in Vienna to consider oil production quotas, but no major changes in current production levels are anticipated.

UN officials said their proposed 1-month extension would give that organization time to study the so-called "smart sanctions" proposed by the US and UK that would modify the 1990 embargo of most of Iraq's oil exports. However, Iraqi officials said they need the full 6 months to ready oil contracts with buyers.

Amer Mohammed Rasheed, Iraq's oil minister, said the country would resume the bulk of its oil exports only with the regular 6-month renewal. However, he said oil deliveries by tanker-trucks to Jordan and Turkey would continue, since those exports are not part of the UN program.

Iraq currently produces 3 million b/d of oil, of which some 2.1 million b/d is exported.

On the New York Mercantile Exchange, the July contract for benchmark US light, sweet crudes regained 20¢ to $28.13/bbl Monday, after a 44¢ loss Friday. The August contract was up 24¢ to $28.41/bbl, recouping most of Friday's 35¢ loss.

Friday's selloff apparently brought technical traders into the markets Monday who helped bid up oil prices, analysts said.

Home heating oil for July delivery was unchanged at 75.92¢/gal, while unleaded gasoline for the same month fell 2.53¢ to 90.77¢/gal Monday on the NYMEX. However, the July contract for natural gas gained 13.9¢ to $4.07/Mcf.

Salomon Smith Barney Inc. said Monday it is lowering its composite spot natural gas price forecast to $4.65/MMBtu for 2001, from its previous forecast of $5/MMBtu. Its average gas price forecast for 2002 is unchanged at $3.75/MMBtu.

The investment banking firm also raised its 2001 forecast for benchmark US sweet, light crudes to $26/bbl, from $24/bbl previously.

Continued strong US demand for gasoline has boosted oil prices, while a combination of increased storage, lost markets, and added production is pushing down natural gas prices, said Robert Morris, energy analyst for Salomon Smith Barney, in his weekly exploration and production report.

Fuel switching has resulted in some 3.5 bcfd of "lost demand" for natural gas as prices escalated this past winter, with conservation reducing that demand another 1.5 bcfd, Morris said.

He also expects US natural gas production to increase in the third quarter by 2 bcfd over year-ago production levels.

However, industry analysts at Simmons & Co. International, Houston, recently reported that the strong increase in North American drilling for natural gas has resulted in little additional production with the "industry still struggling to hold its head above water against the strong undertow of depletion."

"While there is no question that US drilling levels have reached extraordinary heights, our analysis of the last 12 months of rig distribution and associated well depths shows an industry that is simply drilling more of the same low quality wells," said Simmons & Co. analysts in a May 30 report.

In London, the July contract for North Sea Brent crude settled at $29.26/bbl, up 19¢ for the day after trading in a range of $29.03-$29.71/bbl Monday on the International Petroleum Exchange. The July natural gas contract lost 2.9¢ to the equivalent of $3.04/Mcf on the IPE.

The average price for OPEC's basket of seven crudes increased by 24¢ to $27.05/bbl Monday.

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