Market watch: Moderate weather, UN opposition tumble energy futures prices

Sam Fletcher
Senior Writer

HOUSTON, Mar. 11 -- Energy futures prices fell Monday with forecasts of mild weather and increased opposition to US action against Iraq.

Kofi Annan, secretary general of the United Nations, said Monday that the US would violate the UN charter if it takes military action against Iraq without approval of the UN Security Council. Threats by Russia and France to veto any Security Council resolution that includes a threat against Iraq also helped cool energy markets Monday.

The US, UK, and Spain earlier introduced a draft resolution with a Mar. 17 deadline for Iraq to comply with UN requirements for disarmament. However, US officials apparently now plan to delay a Tuesday vote on that resolution until the end of this month.

Part of the problem is the apparent rising discontent within the ruling British labor party over a potential war with Iraq. The UK has been the US's strongest ally on that issue.

The April natural gas contract plummeted 47.8¢ to $6.52/Mcf Monday on the New York Mercantile Exchange, with forecasts of mild US weather during the next few weeks. "The market opened down 30¢(/Mcf) and dipped lower before rising above $6.70(/Mcf) in late morning trading, but then fell steadily off in afternoon trading, ending on the down-tick. The volume was exceptionally thin," said analysts Tuesday at Enerfax Daily. They advised, "Look for a round of consolidation in the market as it digests forecasts for above-normal temperatures in what has been a lightly traded market. The (recent price) volatility has run many traders to the sidelines or to the back months."

The April contract for benchmark US light, sweet crudes dropped 51¢ to $37.27/bbl Monday on NYMEX, while the May position retreated 7¢ to $36.28/bbl as members of the Organization of Petroleum Exporting Countries reiterated that they are prepared to meet any supply shortages in case of military action against Iraq. OPEC oil ministers are in Vienna for a scheduled meeting Tuesday. They are expected to maintain current production quotas, although the average price members receive from their oil has exceeded OPEC's price target of $22-28/bbl for all of this year.

Unleaded gasoline for April delivery fell 2.85¢ to $1.1282/gal, while heating oil for the same month dropped 2.28¢ to $1.0851/gal Monday on NYMEX, despite the fact that US inventories of petroleum products are near record lows.

Jeffries & Co. Inc., New York, on Monday raised its 2003 price forecasts to $29/bbl for benchmark West Texas Intermediate crude and to $5/Mcf for natural gas at Henry Hub, from $25/bbl and $4/Mcf previously. It also hiked its 2004 price forecasts to $25/bbl for oil, from $22/bbl, and to $4.50/Mcf for gas, from $4/Mcf previously.

"The keys to our higher forecast include bullish US and worldwide crude inventory levels, our belief that OPEC will remain a cohesive unit for the foreseeable future, and the difficulties non-OPEC producers are experiencing expanding production," reported Jeffries analysts. "Over the past 4 months, US crude oil inventory levels have plummeted 6.5% to 271.3 million bbl and are currently 14.9% below the year-ago level and 10.7% south of the 5-year average."

They noted, "While the sharp decline in crude inventories were partially due to the precipitous short-term decline in Venezuelan exports, the fact remains that current inventory levels are significantly below historical levels and support a bullish crude oil price outlook."

Resolution of the Iraqi crisis "whether through war or other means will likely lead to a decline in crude prices into the high $20s and possibly a bit lower," the Jeffries analysts said. But with low US and worldwide inventory levels, OPEC's continued resolve to manage oil prices at reasonable levels, and the difficulties of non-OPEC producers in boosting production, they said, "Crude oil prices will not likely fall much below the mid-$20s."

RBC Capital Markets, Toronto, earlier this month also increased its 2003 commodity price forecasts to $5.60/Mcf for gas from $4.15/Mcf previously, and to $26.50/bbl for oil from $24.50/bbl.

In London, the April contract for North Sea Brent oil lost 41¢ to $33.69/bbl Monday on the International Petroleum Exchange. Reports that the majority of UN Security Council members want the proposed Mar. 17 deadline for Iraq's compliance extended to Apr. 17 triggered profit-related selling, said brokers, who also predicted a Tuesday rebound.

The April natural gas contract gained 9¢ to the equivalent of $2.96/Mcf on IPE.

The average price for OPEC's basket of seven benchmark crudes lost 68¢ to
$33.11/bbl Monday.

Contact Sam Fletcher at [email protected]