Market watch: OPEC holds production quota as oil markets rally

Sam Fletcher
OGJ Senior Writer

HOUSTON, Sept.19 -- Energy futures prices rallied Wednesday on bullish reports of reduced US oil inventories and correct market assumptions that the Organization of Petroleum Exporting Countries would retain current production quotas at its ministerial meeting Thursday in Osaka.

After a session that apparently was both more brief and less contentious than some had predicted, OPEC Conference Pres. Rilwanu Lukman announced Thursday that OPEC would maintain its production quota of 21.7 million b/d through the rest of 2002, because "only very moderate global economic growth rates are expected before yearend, with only normal, seasonal growth in demand being expected for the fourth quarter."

At a press conference following that meeting, Lukman emphasized that the drop in crude futures prices Tuesday—after Iraqi officials said in a letter that they would readmit into that country weapons inspectors from the United Nations—proved that recent oil market fluctuations were not due to fundamentals of actual supplies and demand. He estimated a war premium of $4/bbl is built into current oil prices. If OPEC increased production and that additional price premium disappeared, Lukman said, oil prices would fall below OPEC's minimum target level of $22/bbl.

OPEC ministers are to meet again in December in Vienna to review the world oil market.

However, in a report issued Wednesday, analysts at Merrill Lynch, Pierce, Fenner & Smith Inc. in New York said, "Traders may view OPEC's inaction at combating near-$30 oil as meaning 'crude prices aren't high enough yet,' which, from our perspective, leaves the market vulnerable to further upside pressure."

As a result, Merrill Lynch increased its projected 30-day "very near-term" oil price range to $27.50-33/bbl from $25-30/bbl previously. That price "does not take into account prospects for a less than peaceful resolution to the Iraq-UN confrontation," the analysts said.

However, Lukman said Wednesday that OPEC would increase oil supplies if market prices rise "much beyond $28/bbl."

Wednesday's market rally effectively returned crude prices to "about the same level prior to Iraq's announcement about allowing weapons inspectors back into the country," said Merrill Lynch analysts. In an earlier report, they noted Iraq's agreement to readmit those inspectors is "so far, just a sheet of paper" and likely to be "viewed with some skepticism by market participants." Given Baghdad's previous lack of compliance with UN directives, they said, "We are not looking for anything close to a cataclysmic drop in the price of oil in the near term."

The October contract for benchmark US sweet, light crudes gained 40¢ to $29.48/bbl Wednesday on the New York Mercantile Exchange, with the November position up 35¢ to $29.67/bbl. That increase was triggered largely by an American Petroleum Institute report released late Tuesday that US crude inventories fell by 6.4 million bbl last week (OGJ Online, Sept. 18, 2002). That was confirmed early Wednesday by a similarly bullish report of reduced US oil stocks by the US Department of Energy.

Unleaded gasoline for October delivery jumped 2.19¢ to 79.82¢/gal on NYMEX, while heating oil for the same month was up 1.68¢ to 78.91¢/gal.

The October natural gas contract continued its advance, up 10.8¢ to $3.79/Mcf, amid concerns of tropical storm Isidore entering the Gulf of Mexico.

"Most of the day's activity was done in the session's first hour. The market opened higher, dipped below $3.75(/Mcf) before noon, rallied higher in the early afternoon before dropping back near the close," analysts at Enerfax Daily reported Thursday. "A breach of $3.86(/Mcf) resistance today could send the market to $4(/Mcf). However, the market is technically overbought, with strong support in the $3.60s."

Furthermore, they said, "The hurricane premium is tacked on to the market with the threat of Isidore, but if that threat doesn't materialize, prices could drop in a hurry. (Hurricane) Isidore is likely to hit somewhere along the Gulf of Mexico coast, but it is too early to tell where. Landfall could be all the way from Houston to the Florida coastline."

Meanwhile, in London, the November contract for North Sea Brent oil gained 35¢ to $28.32/bbl on the International Petroleum Exchange. The October natural gas contract inched up 1.2¢ to the equivalent of $2.64/Mcf on IPE.

The average price for OPEC's basket of seven benchmark crudes increased 44¢ to $27.36/bbl Wednesday.

Contact Sam Fletcher at samf@ogjonline.com