Market watch: Bush's harsh words to Iraq spurs oil futures prices

Energy futures prices rebounded Wednesday, spurred by strong words from President George W. Bush that indicated no softening of his stand against Iraq.

Sam Fletcher
OGJ Senior Writer

HOUSTON, Sept.5 -- Energy futures prices rebounded Wednesday, spurred by strong words from President George W. Bush that indicated no softening of his stand against Iraq and revived market fears of an armed conflict in the Middle East.

Those fears had subsided earlier this week, lulled by Iraq's offer to negotiate a more favorable agreement on arms inspections, tied to the lifting of United Nations' economic sanctions against that country. As a result, energy futures prices had plummeted Tuesday when the New York Mercantile Exchange resumed trading after the long Labor Day holiday weekend.

Wednesday's rebound was only partial, however, with both the October and November contracts for benchmark US sweet, light crudes gaining 48¢ to $28.27/bbl, sharing the same closing price for the second consecutive session. On Tuesday, the two contracts had plummeted $1.19 and $1.01, respectively, to $27.79/bbl.

Heating oil for October delivery bumped up 2.22¢ to 75.03¢/gal, reclaiming most of its previous 3.54¢ loss. Unleaded gasoline for the same month regained only 1.7¢ to 76.22¢/gal, far short of its earlier 4.2¢ fall.

Following the close of trading, the American Petroleum Institute late Wednesday issued an unexpectedly bullish report of US inventories of oil and petroleum products, with oil stocks down by 6.3 million bbl to 298.9 million bbl during the last week of August. US gasoline stocks fell by 1.4 million bbl to 206.4 million bbl during the same period, while distillate inventories declined by 258,000 bbl to 131.3 million bbl.

However, Matthew Warburton at UBS Warburg LLC in New York said Thursday,

"Given the ongoing political risk premium in oil markets surrounding the aggressive US stance toward Iraq, the market is likely to once again overlook the obvious inconsistencies within this week's API data."

The 9.3 million bbl drop in both crude and petroleum product inventories last week to an aggregate 708.3 million bbl "marks their lowest level since September 2001," said Warburton. "However, such stock levels and demand cover alone would not suggest current oil price levels."

Moreover, he said, "Despite only a slight increase in refinery utilization (+0.3% to 94%) and a minor reduction in crude imports (to 9.4 million b/d), API reported another sharp and unexplained draw in US crude inventories. The majority of the decline was concentrated in Petroleum Administration for Defense District 3 and potentially reflects either an intentional trimming of Gulf Coast refiners' inventories ahead of fall maintenance (and run cuts) or timing effects associated with tanker imports."

Still, said Warburton, "With evidence of a gradual fundamental tightening of global oil inventories and OPEC-10 producing less than the estimated demand for its crude (in the last half of this year), we expect crude prices to remain firm for the foreseeable future."

The October natural gas contract gained 6.1¢ to $3.19/Mcf Wednesday, after losing 16.4¢ during the previous NYMEX session. Wednesday's trading session "opened up and moved steadily higher (through the) morning to $3.29(/Mcf), but then slipped back for much of the afternoon session," said Enerfax Daily analysts. "Much of the market's late-morning and early-afternoon buying was also attributed to another rally in crude oil futures, plus defensive buying against a tropical depression in the Gulf of Mexico, south of Galveston(, Tex). Also, traders are keeping an eye on Tropical Storm Edouard off the north Florida-Georgia coasts."

Early Thursday, the US Energy Information Administration reported that 65 bcf of natural gas was injected into US underground storage last week. That compares with injections of 59 bcf the previous week and 75 bcf during the same period a year ago. There is now 2.78 bcf gas in US storage, amounting to surpluses of 205 bcf compared with a year ago and 310 bcf over the 5-year average.

In London, futures prices for North Sea Brent oil rebounded above $27/bbl on the International Petroleum Exchange. The October Brent contract closed at $27.10/bbl, up 53¢ for the day after trading at $26.54-27.35/bbl. The October natural gas contract gained 1.9¢ to the equivalent of $2.63/Mcf on the IPE.

The average price for the Organization of Petroleum Exporting Countries' basket of seven benchmark oils gained 8¢ to $26.22/bbl Wednesday.

Contact Sam Fletcher at samf@ogjonline.com

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