Market watch: Oil futures prices rally as strike curbs Venezuela's crude exports

Futures prices for oil and petroleum products rallied Monday amid market worries about the continuing strike in Venezuela that has curbed that country's exports of crude oil.

Dec 10th, 2002

Sam Fletcher
OGJ Senior Writer

HOUSTON, Dec. 10 -- Futures prices for oil and petroleum products rallied Monday amid market worries about the continuing strike in Venezuela that has curbed that country's exports of crude oil.

State oil company Petroleos de Venezuela SA (PDVSA) last week declared force majeure because of the strike that has caused a dramatic 25% drop in its oil production and a 50% fall in exports. About 60% of Venezuela's oil exports, some 1.5 million b/d, go to the US. That represents 13% of total US imports of crude and refined products.

US officials have said it is "too early" to determine if the sustained strike would impact US retail prices (OGJ Online, Dec. 9, 2002).

The January contract for benchmark US sweet, light crudes gained 27¢ to $27.20/bbl Monday on the New York Mercantile Exchange, while the February position increased 29¢ to $27.18/bbl. Unleaded gasoline for January delivery jumped 2.18¢ to 76.21¢/gal. Heating oil for the same month was up 1.09¢ to 75.82¢/gal.

However, the January natural gas contract dipped 2.4¢ to $4.36/Mcf on NYMEX. "The market opened lower on moderating weather forecasts and traded sideways for most of the morning before slowly recovering in the afternoon, ending near the high of the day. Locals were waiting around for action, but there was little business being done," said analysts Tuesday at Enerfax Daily.

Meanwhile, J. Marshall Adkins, managing director of energy research and senior oil field service equity analyst in the Houston office of Raymond James & Associates Inc., sees "a very high probability that US natural gas prices will move well above $5/Mcf in the next 6-8 weeks." In a Dec. 2 report, he said, "This means $7-8/Mcf is likely, and double-digit gas prices are not out of the question."

That optimism is "based on a meaningful imbalance in our US natural gas supply-demand model," said Adkins. "Our model is screaming that decreasing US natural gas supply is rapidly careening towards a train wreck with increasing weather-driven gas demand."

Adkins sees "an unprecedented convergence of bullish gas fundamentals that should hit the gas markets in the next 2 months." Those market forces "have never occurred simultaneously until this winter," he said. They are as follow:

-- An unprecedented annual decline of 5-6% in US gas supplies. "The biggest difference in the gas markets today relative to any other time in history is the fact that US gas supply is falling at an unprecedented rate," said Adkins. "Even though we have about 20% more rigs drilling for natural gas today than when we did in the boom in 1997, US gas supply is down 10% since 1997 and is falling at a rate of 5-6%/year."

-- A likely sharp increase in weather-related demand for gas. Adkins claims futures traders and Wall Street analysts are "significantly underestimating the impact of last year's record warm winter upon US natural gas demand." Based on analysis of historical residential and commercial winter consumption of gas, he concluded that "extremely warmer-than-normal" weather last winter dampened US gas demand by more than 1 tcf. "That means under almost any weather scenario, the US is highly likely to see a significant year-over-year increase in natural gas demand that will only exacerbate the supply problem," Adkins said, adding, "If the weather actually turns out to be anywhere near the 30-year normal, then we see a high probability this higher weather-driven demand will shock and overwhelm the US natural gas system."

-- Much of the economy-related gas demand has already been squeezed out. "When the natural gas crisis hit 2 years ago, the shortage was solved within 6 months by increased fuel switching and shuttering of nearly 30% of all US industrial natural gas consumers. Most gas market watchers don't realize that these price-sensitive industrial consumers never returned to the market," Adkins said. "Because this 'low-hanging fruit' has already been picked out of the industrial gas system, the price threshold needed to kill additional industrial-related gas demand will be much higher this year than 2 winters ago. In other words, the natural gas crisis that we foresee this winter will be much more difficult to solve."

In London, futures prices for North Sea Brent oil rose Monday but failed to break resistance at $26/bbl on the International Petroleum Exchange. The January Brent contract increased 30¢ to $25.76/bbl. However, the January natural gas contract plunged 22.2¢ to the equivalent of $4.19/Mcf on IPE.

The first energy ministers from the member nations of the Organization of Petroleum Exporting Countries were scheduled to arrive Tuesday in Vienna for Thursday's meeting on production quotas. Most analysts predict OPEC will not change its official quota but will encourage members to reduce current overproduction.

The average price for OPEC's basket of seven benchmark crudes increased by 32¢ Monday to $26.20/bbl.

Contact Sam Fletcher at Samf@ogjonline.com.

More in General Interest