Market watch: Cold weather, Venezuelan strike push up energy futures prices

Energy futures prices continued to rise Tuesday, with colder-than-normal weather in much of the US and growing concern about Venezuela's general strike, now in its tenth day.

Sam Fletcher
OGJ Senior Writer

HOUSTON, Dec. 11 -- Energy futures prices continued to rise Tuesday, with colder-than-normal weather in much of the US and growing concern about Venezuela's general strike, now in its tenth day, that has drastically reduced oil production and virtually shut down refining operations in that country.

Sources reported Petroleos de Venezuela SA's (PDVSA) total production dropped to 600,000-650,000 b/d of oil, less than a third of its output prior to the strike organized by business, civilian, and political groups in an attempt to force Venezuelan President Hugo Chavez out of office. Critics blame Chavez's left-leaning policies for deepening the country's economic crisis.

Sources reported PDVSA's normal production of 1.4 million b/d from the Lake Maracaibo region alone was likely to be completely shut in Wednesday, while the country's 1.3 million b/d refining capacity was already virtually halted. Rafael Ramirez, Venezuela's minister of energy and mines, said the strike is causing the oil industry to lose at least $30 million/day.

Venezuela, the world's fifth largest oil exporter, normally provides 13% of daily US oil supplies. "At this juncture, US refiners have reported few difficulties nominating spot barrels (and potentially withdrawing from Caribbean storage) to replace lost Venezuelan output," Matthew Warburton, industry analyst with UBS Warburg LLC, New York, reported Wednesday. "Yet to the extent that the loss of Venezuelan crudes endures, we would expect light-heavy crude differentials to narrow and Gulf Coast coking margins to be eroded, compared to the healthy levels seen in October (and) November."

Meanwhile, Venezuela's Defense Minister Jose Luis Prieto warned that other oil producers are threatening to replace Venezuela in international oil markets. In a report Wednesday by OPEC News Agency, Prieto said, "Mexico has said that if Venezuela cannot (provide supplies), they will. They are going to take markets from us, and if they take markets way from us, we are all going to lose."

Meanwhile, the January natural gas contract jumped by 27.7¢ to $4.64/Mcf Tuesday on the New York Mercantile Exchange, with recognition among traders that recent colder-than-normal winter weather is quickly eroding gas storage inventories.

"The (Tuesday) market opened up but suddenly lurched much higher midmorning on a new cold weather forecast and continued to march higher most of the day, ending near highs for the session. The action caught a lot of people short, adding to the rally as they covered," analysts at Enerfax Daily reported Wednesday. "The Energy Information Administration's short-term natural gas outlook predicts production shortfalls next year, and a huge storage withdrawal is on tap for (Thursday)."

Moreover, they said, "The absence of many merchant energy companies (during Tuesday's trading session) was telling. The market is a lot thinner and a lot less efficient because many merchant energy companies are gone. Without those merchants, the market doesn't have a continuous volume of liquidity that keeps straight-up moves like this from occurring. Merchant energy firms would likely be selling into this rally, but they aren't there."

The January contract for benchmark US light, sweet crudes increased by 54¢ to $27.74/bbl Tuesday on NYMEX, while the February position was up 59¢ to $27.77/bbl. Unleaded gasoline for January delivery jumped again, up 2.66¢ to 78.87¢/gal. Heating oil for the same month gained 1.37¢ to 77.19¢/gal.

After the close of NYMEX trading, the American Petroleum Institute reported late Tuesday that US gasoline inventories rose sharply by 4.3 million bbl to 205.4 million bbl during the week ended Dec. 6. US distillate stocks also increased by 1.8 million bbl to 124.5 million bbl, while US crude stocks decreased by a marginal 274,000 bbl to 287.1 million bbl.

"Reduced gasoline production and imports were insufficient to neutralize the seasonal downturn in implied gasoline demand, which fell to 8.6 million b/d, the lowest weekly average since May," Warburton reported. Reduced crude imports, he said, "more than offset the decline in domestic crude runs. However, the 4-week average for US crude imports of 9.4 million b/d remains quite robust, in part reflecting additional (Organizational of Petroleum Exporting Countries)-10 output. "Given the modest decline in OPEC production reported in November and incremental cargoes being diverted to Asia due to narrow Brent-Dubai spreads and peaking fuel oil-distillate demand, we would not expect such import levels to be sustained."

Combined US stocks of crude and petroleum products "remain within the low end of their 5-year range and vulnerable to short-term volatility," said Warburton. "Moreover, with the growing likelihood that OPEC-10 will endeavor to reign in output in (the first quarter of 2003) and the prospect of lower imports in the coming weeks' data, following the ongoing general strike in Venezuela, we expect crude prices to remain well supported in the near term."

In London, the January contract for North Sea Brent oil gained 66¢ to $26.42/bbl Tuesday on the International Petroleum Exchange, in reaction to the loss of Venezuelan production and continued concerns over a potential US-Iraq conflict. However, the January natural gas contract lost 1.3¢ to the equivalent of $4.16/Mcf on IPE.

The average price for OPEC's basket of seven benchmark crudes gained 25¢ to $26.45/bbl Tuesday.

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