Market watch: Middle East tension pulls up oil futures prices

By OGJ editors

HOUSTON, Sept. 10 -- Energy futures prices continued to rally Monday as President George W. Bush pursued support, both at home and abroad, for US military action against Iraq.

Many traders worried that a military conflict, and subsequent disruption of Middle East oil supplies, is a distinct possibility.

However, analysts at Merrill Lynch, Pierce, Fenner & Smith Inc. last week reported, "While many pundits point to a 'war premium' as the reason for robust oil prices, we believe that improving supply-demand and inventory fundamentals are the much more important driver of higher oil prices."

They credited the Organization of Petroleum Exporting Countries with sustaining world oil prices through "the worst global demand in 20 years." The analysts said, "OPEC's output cuts in 2001 and 2002 significantly mitigated the impact of negative demand shocks caused by a slowing economy and the (Sept. 11 terrorist) attacks."

More important, they said, OPEC's strategy of cutting production to compensate for a weak economy is about to pay off for its members by permitting them to expand market shares without a price war.

"While reduced output volumes in 2001 and 2002 did temporarily reduce OPEC's market share, OPEC's share is set to expand in 2003," said Merrill Lynch analysts. "Increasing global demand and declining inventories will require OPEC to increase production by the end of 2002 to avoid a significant decline in inventories."

Without an increase in OPEC production, Merrill Lunch's financial models indicate US oil inventories will plummet to 6.3% below normal by yearend and that oil prices could spike to more than $30/bbl early next year.

The October contract for benchmark US light, sweet crudes inched up 12¢ to $29.73/bbl Monday on the New York Mercantile Exchange. The November contract gained 22¢ to $29.81/bbl. Unleaded gasoline for October delivery increased by 0.37¢ to 79¢ /gal, while heating oil for the same month was up 0.23¢ to 78.62¢.

The October natural gas contract gained 13.4¢ to $3.40/Mcf on NYMEX. "The market opened lower, but steadily moved higher all day. Fund buying, forcing locals (to) cover short positions, started the rally," reported gas market analysts Tuesday at Enerfax Daily. "Look for more range trading today as the market tests previous week's highs in the mid-$3.40s(/Mcf). Support is seen about $3.20(/Mcf)."

Robert Morris at Salomon Smith Barney Inc. predicted that the US Energy Information Administration on Thursday will report injections of 75-85 bcf of natural gas into US underground storage during the week ended Sept. 6. That compares with injections of 97 bcf during the same period a year ago and 65 bcf the previous week. It also would reduce the year-over-year storage surplus to 190 bcf and equates to 320 bcf more than the 5-year average, Morris said.

Moreover, he said, "We expect that this week the EIA will change the reference month used to calculate its weekly storage injections, which may result in a storage estimate revision for the current and prior weeks."

Weekly gas storage data is collected by EIA officials from a sample of all US storage operators and then "grossed up" to estimate total storage levels, Morris explained. "EIA also conducts a monthly survey where in it collects data from all storage operators. The ratio used to 'gross up' weekly volumes from its sample survey is recalculated each month based on the most recent monthly data," he said.

"As a rule, each time the reference month is changed, the EIA will revise its calculation process for both the current and prior weeks, and will report a revision if the adjustment is greater than 7 bcf," said Morris.

In London, futures prices for North Sea Brent oil were up slightly on the International Petroleum Exchange. Brokers reported prices dipped earlier Monday with indications that OPEC ministers may consider a production hike at their Sept. 19 conference in Osaka, Japan. However, prices later rebounded upon remarks by Dhakib Khelil, Algeria's minister of energy and mines, stressing that OPEC plans to keep oil prices at $22-28/bbl.

The October Brent contract settled at $28.49/bbl Monday, up 20¢ for the day after trading in a range of $28.05-28.65 on IPE. The October natural gas contract jumped by 5.2¢ to the equivalent of $2.69/Mcf.

The average price of OPEC's basket of seven benchmark crudes gained 7¢ to $27.59/bbl Monday.

For all of last week, however, that basket price averaged $26.54/bbl, down 4¢ from the previous week's average. So far this year, OPEC's basket price has averaged $23.13/bbl, up slightly from the average price of $23.12/bbl for all of 2001.