Market watch: Profit-taking lowers energy prices in still bullish market

Futures prices for oil and petroleum products declined Thursday in a wave of profit taking on the New York and London markets.

By OGJ editors

HOUSTON, Aug. 23 -- Futures prices for oil and petroleum products declined Thursday in a wave of profit taking on the New York and London markets.

Market sentiment remains "extremely bullish," said one source, but prices had risen so much in recent trading sessions that a downward correction was inevitable. Reports earlier this week by both the American Petroleum Institute and the US Department of Energy of strong increases in US inventories of oil and unleaded gasoline provided justification for Thursday's sell-off, although those stocks remain below average levels for the past several years, said analysts.

The rise in oil futures prices in recent weeks includes a "war premium" of about 10%, based on strong speculation among traders that increased tensions between the US and Iraq will almost certainly result in some military action soon that would threaten oil shipments from the Middle East.

However, matters are seldom that simple in international business, and there is now talk of a possible price collapse if an armed US-Iraq confrontation proves to be less disruptive than anticipated—or even fails to occur.

Moreover, most traders and industry observers are expecting energy ministers of the Organization of Petroleum Exporting Countries to increase production quotas at their scheduled Sept. 19 meeting in Osaka, Japan, in order to roll oil prices back to $25/bbl or less. Algeria has officially requested a hike in its quota at that meeting.

But Sheikh Ahmad Fahad Al-Ahmad Al-Sabah, Kuwait's acting oil minister, earlier this week called for OPEC to maintain the current quotas. "When prices increase above $30/bbl, then OPEC will take the necessary measures to restore prices to within the $22-28/bbl range," he said. The average price for OPEC's basket of seven benchmark crudes lost 17¢ to $26.78/bbl Thursday

Meanwhile, analyst Paul Ting with Salomon Smith Barney Inc. in New York this week raised his spot price forecast for West Texas Intermediate crude to $27/bbl for both the third and fourth quarters, up from earlier projections of $25/bbl and $19/bbl/ respectively. That's keyed to his evaluation that the war premium price for oil will continue through the rest of this year

Based on that revised oil price forecast, "we do not expect any natural gas demand to switch to fuel oil-distillates during the remainder of this year," Robert S. Morris, another Salomon Smith Barney analyst, reported this week.

"We estimate that the amount of natural gas demand that can easily switch to....fuel oil is roughly 4 bcfd, or up to 7% of our projected natural gas demand for the fuel year," he said. "Thus, we had previously assumed that 4 bcfd of natural gas demand would be 'lost' to fuel oil-distillates in November-December, based on (our) prior $19/bbl spot WTI oil price forecast for 2003."

Salomon Smith Barney is still pegging its composite spot gas price forecasts at $3.25/Mcf for the final quarter of this year and at $3.50/Mcf for all of 2003. However, the 2003 price projection is based on temperatures this winter matching a 10-year average. "A 10% warmer-than-normal winter should yield an average price closer to $3/MMbtu and a 10% colder-than-normal winter could see prices average closer to $4(/MMbtu) or perhaps higher for the full year," Morris said.

The October contract for benchmark US light, sweet crudes dropped 40¢ to $28.84/bbl Thursday on the New York Mercantile Exchange, while the November position declined by 19¢ to $28.31/bbl. Unleaded gasoline for September delivery fell 1¢ to 79.66¢/gal in a market where most price changes are measured in fractions of a penny. Heating oil for the same month lost 0.6¢ to 74.8¢/gal.

However, the September natural gas contract continued its strong rally, jumping 24.1¢ to $3.52/Mcf Thursday, after a gain of 10.8¢/Mcf on Wednesday.

The latest increase was driven by a bullish natural gas storage report, "supported by technical buying and heavy short covering by funds that have shown extreme net short positions in the late summer," analysts at Enerfax Daily reported Friday. "The market has risen almost 90¢/Mcf since Aug. 7."

However, they warned, "Look for profit-taking today, and a pullback in the near-term. On the upside, short-term resistance is seen at $3.60(/Mcf)."

Enerfax analysts also reported, "The Edison Energy Institute said more than 80,000 gigawatts of power was generated last week across the nation, the 8th consecutive week above that level, an indication of steady demand." They said natural gas injections into underground storage "are still on pace to reach 3.25 tcf by this winter."

In London, the October contract for North Sea Brent oil lost 39¢ to $27.02/bbl on the International Petroleum Exchange. However, the September natural gas contract increased by 1.7¢ to the equivalent of $1.94/Mcf on the IPE.

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