Market watch: Threats of war and cold weather push up energy prices

Energy futures prices continued to rally Thursday, with traders again bidding up the so-called "war premium" on oil as members of NATO followed the US lead in voting to help the UN disarm Iraq.

Sam Fletcher
OGJ Senior Writer

HOUSTON, Nov. 22 -- Energy futures prices continued to rally Thursday, with traders again bidding up the so-called "war premium" on oil as members of the North Atlantic Treaty Organization followed the US lead in voting to help the United Nations disarm Iraq.

The rally was assisted by forecasts of colder weather in the US, reports of improved compliance with production quotas among members the Organization of Petroleum Exporting Countries, and the threat of a possible oil workers' strike in Venezuela, analysts said.

The January contract for benchmark US light, sweet crudes gained 26¢ to $26.35/bbl Thursday on the New York Mercantile Exchange, while the February position increased 31¢ to $26.20/bbl.

Unleaded gasoline for December delivery rose 1.13¢ to 72.42¢/gal on NYMEX. Heating oil for the same month was up 0.42¢ to 74.93¢/gal.

Forecasts of US temperatures well below normal into the first week of December helped boost the December natural gas contract by 9.7¢ to $4.35/Mcf Thursday on NYMEX. A report by the Energy Information Administration (EIA) that US gas storage decreased by 1 bcf in the week ended Nov. 15 also prompted short covering and technical buying, analysts said.

"Arctic cold is expected for late November and early December, which should keep prices above $4(/Mcf) for a while," analysts at Enerfax Daily said Friday. "On Wednesday, the EIA reported that (US) natural gas demand is expected to increase as much as 54% by 2025, and supplies are increasingly dependent on large and new domestic finds, as well as imports."

Although natural gas prices have risen above residual fuel oil prices along the East Coast, no more than 500 MMcfd of gas demand has been lost to fuel switching so far this year, said Robert Morris with Salomon Smith Barney Inc., New York.

"Based solely on price comparisons, city gate natural gas prices lost their advantage to city gate residual fuel oil prices about 4 weeks ago in the Northeast and roughly 6 weeks ago in the Southeast, although natural gas prices have not yet risen above residual fuel oil prices (along) the Gulf Coast," he said Thursday.

"However, the economic incentive to switch also depends on incremental residual fuel oil transportation costs, taxes, and associated emission credits. At the same time, contractual obligations and the time required to purchase and transport residual fuel further limits certain users' ability to switch near term without assurance that a price disparity will persist," he said.

Therefore, Morris forecast that the amount of US gas demand at risk of getting lost to fuel switching is around 4 bcfd, or 7% of annual demand, if natural gas prices remain higher than residual and distillate prices "for an extended period."

In London, the January contract for North Sea Brent oil gained 30¢ to $24.83/bbl Thursday on the International Petroleum Exchange. However, the price for the December gas contract continued its earlier decline, down 4.3¢ to the equivalent of $3.46/Mcf on IPE.

The average price for OPEC's basket of seven benchmark crudes increased by 50¢ to $24.81/bbl Thursday.

Contact Sam Fletcher at samf@ogjonline.com

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