MARKET WATCHOil futures prices decline in drifting markets

Sam Fletcher
Senior Writer

HOUSTON, Aug. 1 -- Traders took no notice of the Organization of Petroleum Exporting Countries' expected decision Thursday to maintain current production quotas, but reports that a major pipeline in northern Iraq may soon be operational caused a drop in oil futures prices.

OPEC officials meeting in Vienna decided no quota adjustments were necessary since world oil markets are "stable and well supplied" and prices are "within agreed levels" (OGJ Online, July 31, 2003). Analysts earlier reported world energy markets had already factored into current prices the probability that OPEC would take no action. OPEC members are scheduled to meet again Sept. 24.

With no other major influence, traders reacted to their perennial fear that Iraqi oil may someday flood world markets. The September contract for benchmark US light, sweet crudes lost 14¢ to $30.54/bbl Thursday on the New York Mercantile Exchange, while the October price dipped by 6¢ to $30.25/bbl. Unleaded gasoline for August delivery dropped 0.73¢ to 90.16¢/gal. Heating oil for the same month was down 0.33¢ to 79.33¢/gal.

However, the September natural gas contract gained 5¢ to $4.72/Mcf Thursday on NYMEX. That rise came on short-covering (buying contracts to offset market positions not previously closed out) after the US Energy Information Administration reported Thursday the injection of 83 bcf of natural gas into US underground storage during the week ended July 25.

Despite that gain, said analysts Friday at Enerfax Daily, "The market has had a tough time sustaining a rally this week as mild weather in major Midwest and East Coast markets continued to cut cooling demand." They said, "Although the fundamentals are still bearish, a possible storm brewing in the Atlantic could bring more short-covering" during Friday's session.

Natural gas outlook
The latest injection of gas into US underground storage was the same amount as the previous week but up from 48 bcf during the same period last year. US gas storage now stands at 2.03 tcf, 502 bcf less than at this time in 2002 and 257 bcf below the 5-year average.

Robert S. Morris, an analyst with Banc of America Securities LLC, New York, said the latest gas injection data represent less than 6 bcfd of backed-out demand for natural gas in the US market, down from roughly 6.5 bcfd during the previous week after adjusting for gas production in the Gulf of Mexico that was shut in because of Hurricane Claudette (OGJ Online, July 25, 2003).

"We attribute this (decline in backed-out demand) primarily to incremental fuel-switching back to natural gas, given the recent shift in pricing parity," Morris reported Thursday. "The continued pullback in natural gas prices relative to fuel oil prices should result in further incremental switching back to natural gas over the next several weeks."

He said, "Natural gas has now been cheaper than distillate fuel oil (on an energy equivalent basis) in the Southeast and Gulf Coast (markets) for 5 consecutive weeks and in the Northeast for the last 4 weeks." Those are the key regions for fuel switching.

"However, robust weekly injection figures in July until this week had not indicated much 'recaptured demand,' which may be explained by some (plant) operators having delayed switching back to natural gas because of either the need to work off oil inventories or wanting to see the sustainability of the price discount," said Morris.

Nonetheless, the latest injection data indicate "500 MMcfd-1 bcfd of demand was recaptured relative to the prior week," he said.

The pricing differential between natural gas and fuel oil during the just completed August bid-week (a week of active trading in natural gas markets late each month, driven by the pipeline nomination process) provided "an even greater incentive for operators to switch back to natural gas from distillate. We estimate that August bid-week natural gas prices were roughly 90¢/MMbtu below distillate prices in the Northeast and roughly $1.20/MMbtu below distillate prices in the Southeast and the Gulf Coast," Morris said.

"Natural gas should recapture additional 'lost' demand over the next few weeks, although we may not see the full impact until injections for the first week of August are reported in 2 weeks," he said.

Meanwhile, Morris said reports of second quarter results among the largest publicly traded oil and gas companies indicate that US production of natural gas declined in that period by 0.6% from the previous quarter and nearly 2% from the second quarter of 2002.

Other prices
In London, the September contract for North Sea Brent oil declined by 13¢ to $28.37/bbl Thursday on the International Petroleum Exchange. Brokers said that, with no major new developments to influence that market, oil futures prices are likely to drift lower and test support at $28/bbl.

The September natural gas contract dropped 2.8¢ to the equivalent of $2.61/Mcf on IPE.

The average price for OPEC's basket of benchmark crudes gained 21¢ to $27.52/bbl Thursday.

Contact Sam Fletcher at [email protected]