Market watch: Energy futures prices sag as US pushes for action against Iraq

Energy futures prices generally sagged Friday as traders shifted their focus from cooler weather to continued speculation over whether the US will take military action against Iraq.

By OGJ editors

HOUSTON, Nov. 4 -- Energy futures prices generally sagged Friday as traders shifted their focus from cooler weather to continued speculation over whether the US will take military action against Iraq.

Robert Morris at Salmon Smith Barney Inc., New York, reported Monday that oil prices last week "rose just slightly from a 2.5-month low as the US appears to be drawing closer to winning support from the UN Security Council on a new resolution regarding Iraq and weapons inspections."

After 7 weeks of debate already, the US is expected this week to present a revised resolution to the UN.

"The biggest concern among veto-welding members France, Russia, and China has been that the US would use terminology in the resolution to take military action against Iraq without council approval. Thus, the delay in reaching an agreement among Security Council members and the desire by France, Russia, and China to review the inspection process before authorizing any military action has recently reduced some of the 'war premium' in oil prices," said Morris.

"In any case," he said, "military action does not appear imminent, although oil prices are expected to retain much of their current 'war premium' for the time being."

The December contract for benchmark US light, sweet crudes lost 9¢ to $27.13/bbl Friday on the New York Mercantile Exchange. The January position dropped 17¢ to $26.71/bbl.

Heating oil for December delivery slipped by 0.74¢ to 74.16¢/gal on NYMEX, but unleaded gasoline for the same month gained 0.99¢ to 76.45¢/gal because of uncharacteristically low inventories for this time of year.

The December natural gas contract lost 9.6¢ to $4.06/Mcf Friday on NYMEX. "The latest weather reports indicating milder-than-normal temperatures have put a cap on the market for now, but traders want to wait until today and see what the weather does before any serious drop takes place," said analysts Monday at Enerfax Daily. "The market has been trading in a $3.99-$4.40(/Mcf) range since early August. A breach of $3.99(/Mcf) could bring more selling."

However, Morris reported, "Colder temperatures are projected throughout this week over most of the country, particularly in the central and Northeast US. Importantly, we expect the first storage withdrawal to be reported this week. Consequently, subsequent to colder-than-normal temperatures for 2 of the last 3 weeks, beginning-of-November storage levels may come up short but will still be close to last year's record mark."

In London, futures prices for North Sea Brent oil drifted lower on the International Petroleum Exchange, with reduced expectations of US military action against Iraq despite a bullish outlook on US demand for fuel, particularly gasoline. The December Brent contract fell 31¢ Friday to $25.41/bbl
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The December natural gas contract dipped by 1.9¢ to the equivalent of $3.77/Mcf on IPE.

The average price for the Organization of Petroleum Exporting Countries' basket of seven benchmark crudes retreated by 11¢ to $25.29/bbl Friday.

For the whole week, however, that average price dropped $1.43 to $25.54/bbl, from a revised figure of $26.97 the previous week. So far this year, the OPEC basket price has averaged $23.91/bbl, including an average $27.32/bbl for all of October. That compares with average prices of $23.12/bbl in 2001 and $27.69/bbl in 2000.

Tanker tracking data for October indicated continued over-production by the 10 active OPEC members, minus Iraq, above their combined quota of 21.7 million b/d, Matthew Warburton with UBS Warburg LLC, New York, reported Monday.

"Revised estimates for October have production at 24.19 million b/d vs. 24.12 million b/d for September, with only Indonesia not producing above its quota," said Warburton. "This level of OPEC-10 production would indicate that inventories are no longer being drawn down."

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