Market watch: Middle East tension pulls up energy futures prices
By OGJ editors
HOUSTON, June 25 -- Increased political tensions in the Middle East pulled up energy futures prices Monday as traders maneuvered to cover short positions in the market.
Energy ministers from member nations of the Organization of Petroleum Exporting Countries are gathering in Vienna for a special meeting Wednesday to review the world oil market and the effect of its December decision to reduce its production quota by 1.5 million b/d for 6 months.
OPEC members are expected to continue the current production ceiling at least through September. That likelihood has already been factored into the oil market, so there should be major effect on prices, analysts said.
Some are skeptical that OPEC can maintain its production discipline now that non-members Russia and Norway have announced plans to increase oil output and more OPEC members are reportedly exceeding their quotas.
"Over the past year, OPEC has been 77% 'compliant' with official production quotas, a mere C+ by pure academic standards," said Tyler Dann, energy analyst for Banc of America Securities LLC, a subsidiary of Bank of America Corp.
However, Dann said in a weekly petroleum report Monday that "a more important factor, albeit more difficult to quantify, is the level of communication and coordination among OPEC members. Recent behind-the-scenes coordination has been evident, as many OPEC members have announced their expectations of a production quota renewal well ahead of this week's official announcement."
He said, "OPEC is effective at varying output with price levels in an attempt to keep the basket price within its stated range of $22-28/bbl. In the current environment, where Russian production threatens to take a strong hold on market share, OPEC has a vested interest in remaining coordinated in its effort to sustain both prices and market share."
Moreover, apparent cheating among OPEC members "may be more coordinated than might be evident on the surface," said Dann.
Some combination of increased world demand or higher market prices for oil could cause OPEC to increase its production quotas before September. However, Dann said, "Production increases are more likely to come from 'leakage' rather than from an official quota increase."
The August contract for benchmark US sweet, light crudes jumped 65¢ to $26.47/bbl Monday on the New York Mercantile Exchange, while the September position increased by 55¢ to $26.27/bbl. Both continued climbing in after-hours electronic trading to $26.70/bbl and $26.49/bbl, respectively.
Unleaded gasoline for July delivery escalated by 2.2¢ to 77.77¢/gal on NYMEX. Heating oil for the same month rose 1.75¢ to 66.64¢/gal. The July natural gas contract jumped by 21.8¢ to $3.46/Mcf.
In London, futures prices for North Sea Brent oil increased during late trading to close above $25/bbl on the International Petroleum Exchange. The August Brent contract was up 52¢ to $25.27/bbl.
However, the July natural gas contract fell 7¢ to the equivalent of $1.79/Mcf on the IPE. Daily price changes for near-month gas contracts have been somewhat distorted in recent weeks by the rapid strengthening of the British pound against the dollar.
The average price for OPEC's basket of seven benchmark crudes increased by 48¢ to $24.56/bbl Monday.