Sam Fletcher
Senior Writer
HOUSTON, Sept. 23 -- Energy futures prices generally advanced Monday as markets corrected from Friday's sharp declines in the wake of Hurricane Isabel, which inflicted virtually no damage to oil or gas facilities in the US.
But even before Isabel made landfall in North Carolina, oil futures prices hit a 4-month low Sept. 17 on the New York Mercantile Exchange following reports of a greater-than-expected build in US inventories of crude and petroleum products.
The US Energy Information Administration reported commercial US crude inventories totaled 279.3 million bbl as of Sept. 12, which is 8.5 million bbl below year-ago levels and down by 23 million bbl from the 5-year average for that period (OGJ Online, Sept. 18, 2003).
Even earlier, the International Energy Agency in Paris warned that industry oil inventories among members of the Organization for Economic Cooperation and Development, including the US, "are heading into the winter heating season at the bottom of their 5-year range. Despite a recent build in product stocks, crude oil stocks, especially those in OECD North America, are low" (OGJ Online, Sept. 10, 2003). IEA reported OECD oil inventories totaled 2.55 billion bbl at the end of July, the latest period for which data is available. That is down by 80 million bbl from the same period in 2002 and 95 million bbl below the 5-year average.
Low inventories disputed
"However, a closer look at the figures reveals that inventories are not low and demand may be less robust than is generally thought," said analysts at Bear, Sterns & Co. Inc., New York.
"Contrary to the popular perception, US crude oil inventories have been rising sharply since April and are at high levels by historical measures," they said in a report released Monday. "Since April, the US Strategic Petroleum Reserve has increased by 20.8 million bbl, filling at an average rate of 1 million bbl/week. SPR now holds 620.2 million bbl of oil."
SPR oil is not included in the commercial inventory figures reported weekly by EIA and the American Petroleum Institute. However, said Bear, Sterns analysts, "When SPR oil is added to primary [US commercial] storage, the total inventory level at this time of the year is the highest since 1995, a time when oil prices were $18/bbl."
Moreover, analysts said, "When the effect of the SPR purchases is taken out of implied demand figures, actual oil consumption is weak. Year-to-date, implied demand for oil (crude oil only) in the US is 15.2 million b/d, up 2.7%. But when adjusted for the SPR inventory build, demand falls to 14.7 million b/d, down 0.7%."
They also noted that IEA figures show government-held oil reserves in OECD countries increased by 18 million bbl during the first 6 months of 2003. "We calculate that strategic reserves in OECD countries, excluding the US, built by 9.6 million bbl during the first 6 months of this year, or 14% greater than the build in the US during that time period," analysts said.
"So far, the oil market has been unconcerned about the rise in government stocks," said Bear Sterns analysts. However, they said, oil "could play an important role in the 2004 US presidential election."
Oil as an election factor
Bear Sterns analysts said they're convinced that President George W. Bush's administration would shun any release of SPR oil "under anything other than an actual oil shortage scenario." However, they said, "There may be a more direct way for President Bush to pressure oil prices and help boost the economy—simply stop filling the SPR."
Slowing or stopping the SPR fill could make additional oil supplies available to the market. "If the fill is stopped, it would show itself as a nearly 1% drop in 'demand,'" analysts said.
"Next year may also be a good time for the administration to ask for help from [Saudi Arabia]," analysts said. "It might be in the Saudi royal family's interest to see President Bush reelected, given his strong commitment to a military presence in Iraq and to wiping out terrorism. If oil prices come under pressure from rising supplies, as we anticipate, the Saudis could be in a good position to aid economic growth (and . . . Bush's reelection) by allowing oil prices to fall by simply standing by and doing nothing."
IOCs and OPEC
Meanwhile, analysts at Wood Mackenzie Ltd., Edinburgh, predicted Tuesday a greater role for international oil companies in the exploration and development of new reserves in member countries of the Organization of Petroleum Exporting Countries.
"By 2010, OPEC will increasingly face the need to expand oil production, in response to growing global demand and increased market share, from fields with ever greater technical challenges. This dilemma will increase momentum to encourage IOC involvement in OPEC's oil industries," said Martin Purvis, senior consultant with Wood Mackenzie's Middle East team.
The report noted, "Several OPEC countries have benefited from IOC expertise and access to capital, as exemplified by the recent and near-term production growth, with international participation, in Algeria, Venezuela, Iran, and Libya."
International participation now accounts for some 31% of OPEC's total oil production, up from "a low point of around 25% in 1981," said Wood Mackenzie analysts. Such participation could expand to 40% by the end of this decade "if current plans for expanded IOC involvement are implemented," they said.
"There are very few examples of national oil companies making significant net increases in production capacity without the direct participation of the international industry in some form. The only country that has been able to develop major net capacity increase without such participation has been Saudi Arabia," the Wood Mackenzie report noted.
"The IOCs will never dominate production [in OPEC countries] as they once did in the past but will develop new roles based on a redefined, mutual dependence with each state resource-owner. This will create a foundation for sustainable relationships, which could provide the more responsive IOCs with a future beyond the decline of non-OPEC production," said Purvis.
Energy prices
Unleaded gasoline for October delivery regained 1.3¢ to 80¢/gal Monday on NYMEX. Heating oil for the same month increased by 0.3¢ to 70.19¢/gal. The October contract for benchmark US sweet, light crudes lost 7¢ to $26.96/bbl, but the November contract was up by 12¢ to $27.19/bbl.
The October natural gas contract inched up by 1.1¢ to $4.49/Mcf Monday on NYMEX, "with front months underpinned by still-wide spreads [price differences] to winter [months], despite fairly mild weather forecasts this week that should limit demand," said analysts Tuesday at Enerfax Daily.
"The weather looks pretty moderate, but spreads to winter months are still encouraging storage demand. While a discounted cash market, which is still 10¢[/Mcf] below [the near-month] futures [price], could weigh on October ahead of its expiration, the steep 70¢[/Mcf] carry to January could limit the downside despite bearish technicals after last week's slide," they said.
In London, the November contract for North Sea Brent oil gained 21¢ to $25.53/bbl on the International Petroleum Exchange. The October natural gas contract was up by 3.5¢ to the equivalent of $3.21/Mcf on IPE.
The average price for OPEC's basket of seven benchmark crudes remained unchanged at $24.82/bbl Monday. OPEC ministers are scheduled to meet Wednesday in Vienna, but several have already indicated they expect to make no changes in the group's current production quotas.
Contact Sam Fletcher at [email protected]
