Market watch: Energy futures prices weaken with OPEC reassurances

Energy futures prices weakened Tuesday as members of OPEC reassured consumers they would increase oil production to offset any shortfall that might result from military conflict in the Middle East.

By OGJ editors

HOUSTON, Aug. 28 -- Energy futures prices weakened Tuesday on the New York Mercantile Exchange as members of the Organization of Petroleum Exporting Countries reassured consumers that they would increase oil production to offset any shortfall that might result from military conflict in the Middle East.

As the dispute drags on between the US and Iraq over Saddam Hussein's suspected stockpiling of weapons, analysts said, the futures market apparently has imposed too much of a war premium on oil prices. The likelihood of possible disruptions of oil supplies from the Middle East may not be as great as previously anticipated, some said.

The drop in NYMEX prices for oil and petroleum products Tuesday diminished gains from the previous session. The October contract for benchmark US sweet, light crudes fell 45¢ to $28.83/bbl, while the November position was down 31¢ to $28.60/bbl.

Unleaded gasoline for September delivery declined by 0.31¢ to 81.8¢/gal. Heating oil for the same month slipped by 0.1¢ to 75.01¢/gal.

The September natural gas contract dropped 13.4¢ to $3.48/Mcf, wiping out Monday's gain of 13¢/Mcf. "The market opened lower and fell early on profit-taking by trade and locals. Physical prices at the Henry Hub ended the session only down slightly, converging with the NYMEX, adding some support for futures. However, the market will likely move lower today ahead of expiration" of the September gas contract, analysts at Enerfax Daily reported Wednesday.

"Also on the downside, there are no tropical storms in the Gulf of Mexico or Atlantic. Temperatures are moderating in the Northeast and over much of the nation," they said.

In London, futures prices for North Sea Brent oil opened strongly Tuesday on the International Petroleum Exchange, which was closed Monday for a public holiday. Volatile trading was boosted by expectations that OPEC ministers already have reached a consensus to maintain the group's current production ceiling through the fourth quarter. However, prices dipped with profit-taking toward the close of that session, after reaching almost $28/bbl, brokers said.

The October Brent contract closed at $27.22/bbl, up 23¢ for the day after trading in a range of $27.17-27.92/bbl. The September natural gas contract inched up 0.6¢ to the equivalent of $1.95/Mcf on IPE.

The average price for OPEC's basket of seven benchmark crudes was unchanged at $26.67/bbl.

Following the close of NYMEX trading Tuesday, the American Petroleum Institute reported US oil inventories jumped by 2.9 million bbl to 305.2 million bbl last week. During the same period, however, US gasoline stocks fell by 2.1 million bbl to 207.8 million, while distillate stocks were down 1.1 million bbl to 131.6 million bbl.

"With a further build in crude inventories and the draw in products potentially a temporary phenomenon in anticipation of the forthcoming US Labor Day holiday, we would expect this week's API report to have a neutral to mildly bearish impact on crude and product prices," Matthew Warburton at UBS Warburg LLC said Wednesday.

"However, with continuing aggressive rhetoric from the US administration toward Iraq and growing uncertainty over a potential quota increase from OPEC-10 (the 10 active OPEC members, minus Iraq), oil prices are likely to remain well-supported in the near term," he said.

Continued high levels of US oil imports, averaging 9.5 million b/d last week, contributed to the build of US crude inventories "despite early maintenance at several US refineries resulting in diminished refinery runs," Warburton said. US refineries were operating at 93.7% capacity last week, compared with 94.6% the previous week and 92.2% a year ago.

This latest build in US crude inventories "has essentially reversed the suspect draw (reported) 2 weeks ago," said Warburton. Although oil stocks remain tight in the upper Midwest, current total crude inventories "would not support the recent strength in oil prices," he said.

Last week's distillate draw "in contrast to traders' expectations" was "due to resurgence in implied demand," amounting to 230,000 b/d week-to-week, said Warburton. "While the recent recovery in US natural gas prices could be a factor behind the increase in implied demand," he said, "refiners continue to announce run cuts in order to stem losses from the current negative distillate crack spreads."

Moreover, he said, "With expectations of a relatively light refinery maintenance season this fall and a potential aversion to further distillate production given current inventory levels, we would expect higher than normal gasoline yields to persist in the near term. However, the combination of the impending switch to winter grade gasoline and the continuing high levels of product imports could pose a substantial logistical challenge to the US refining system in coming weeks."

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