Market watch: Oil futures prices hit 8-week high on strong market fundamentals

Spurred by the Organization of Petroleum Exporting Countries' promise to rein in overproduction and by an increasingly bitter strike in Venezuela that has wrecked its crude production and exports, oil futures prices shot to an 8-week high Friday.

Sam Fletcher
OGJ Senior Writer
HOUSTON, Dec. 16 -- Spurred by the Organization of Petroleum Exporting Countries' promise to rein in overproduction and by an increasingly bitter strike in Venezuela that has wrecked its crude production and exports, oil futures prices shot to an 8-week high Friday.

The general strike, aimed at ousting Venezuelan President Hugo Chavez, entered its third week with weekend demonstrations by more than 1 million people calling for him either to resign or hold new elections in March. Despite claims by Venezuelan officials that they were regaining control late last week (OGJ Online, Dec. 13, 2002), outside sources Monday reported no sign of an end to the strike that has sharply curtailed exports of oil and gasoline, primarily to US markets.

Citgo Petroleum Corp., the international downstream arm of Petroleos de Venezuela (PDVSA), has been hardest hit by curtailment of Venezuela's exports. Citgo is the biggest importer of Venezuelan crude into the US, averaging 359,000 b/d. ConocoPhillips is second, at 232,000 b/d.

At their meeting in Vienna last week, OPEC ministers agreed to increase the group's total production quota by 1.3 million b/d to 23 million b/d in January, providing members cut current overproduction by 1.4 million b/d (OGJ Online, Dec. 13, 2002). Robert Morris, industry analyst with Salomon Smith Barney Inc., New York, reported Monday that Saudi Arabia has already notified customers that they will receive less oil in January.

"Assuming Iraqi exports continue uninterrupted, we expect a decrease in output of roughly 1 million b/d by February-March will be sufficient to avert a damaging rise in inventories in (the first half of) 2003 and will thus stabilize oil prices," Matthew Warburton, an analyst with UBS Warburg LLC, New York, reported Monday. "Moreover, OPEC-10 has now given itself flexibility to lower quotas in March, if necessary to protect its desired price range of $22-28/bbl."

Whether Iraq will continue uninterrupted exports of its oil under the oil-for-aid program administered by the United Nations is undecided, however. Some of the more insightful analysts claim that the so-called cheating by other OPEC members was a coordinated effort to make up for Iraq's curtailment of its oil exports in a dispute with UN officials over the administration of that program earlier this year.

Meanwhile, a report by Hans Blix, the chief UN weapons inspector, on Iraq's earlier required declaration of weapons of mass destruction is scheduled later this week. There is still a strong chance of armed conflict between Iraq and UN members at some point, analysts said.

With the Venezuelan strike still in progress and a report Friday that Valero shut down for 10 days of repairs the 80,000 b/d fluid catalytic cracking unit at its Texas City, Tex., refinery, the January contract for unleaded gasoline jumped by 3.24¢ to 83.95¢/gal on the New York Mercantile Exchange. Heating oil for January delivery was up 2.31¢ to 81.56¢/gal. The January contract for benchmark US light, sweet crudes gained 43¢ to $28.44/bbl Friday, while the February position increased by 46¢ to $28.45/bbl.

The January natural gas contract shot up 19.5¢ to a 20-month high of $5.28/Mcf Friday on NYMEX, with forecasts of a cold end to December coupled with earlier reports of a sharp draw down of gas storage supplies already this year.

"The last time the market was at this level was in April 2001 when it was coming off its historic $10.10(/Mcf) high from December 2000," analysts at Enerfax Daily reported Monday. "The rally continued yesterday on the strength of last week's 162 bcf withdrawal from storage, leaving it 444 bcf behind last year; predictions of blizzard-like cold coming at the end of the month and into January; a (US Energy Information Administration) report warning that production is down and demand increasing; higher crude oil futures; and a tight, illiquid market, thinned by the lack of selling that might have been expected from major merchants no longer trading."

They warned, "Look for technical resistance at $5.56, $5.62, $5.71 and $6.13(/Mcf). If the market gets above $5.71(/Mcf), it is off to the races again."

In London, the January contract for North Sea Brent oil rose 34¢ to $27.21/bbl on the International Petroleum Exchange. However, the January contract for natural gas declined by 2.6¢ to the equivalent of $3.96/Mcf on IPE.

The average price for OPEC's basket of seven benchmark crudes increased by 56¢ to $27.62/bbl Friday.

For the whole week, however, the average price was up 76¢ to $26.48/bbl from an average $25.72/bbl in the first week of December. So far this year, OPEC's basket price has averaged $24.03/bbl, up from $23.12/bbl during all of 2001.
Contact Sam Fletcher at samf@ogjonline.com

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