MARKET WATCHEnergy futures markets seek direction
Sam Fletcher
Senior Writer
HOUSTON, Sept. 9 -- Energy prices were mixed Monday as futures markets awaited new developments that would move prices up or down.
Meanwhile, Raymond James & Associates Inc., St. Petersburg, Fla.—among the more bullish industry analysts—jumped its 2004 price forecasts to $28/bbl for oil from $26/bbl previously. However, the firm lowered its outlook for US natural gas prices to $5.50/Mcf from the previous $6/Mcf, based on destruction of US gas demand because of higher prices.
Oil market fundamentals
"With an improving global economy and numerous supply interruption wildcards (i.e. Iraq, Venezuela, and Nigeria), we believe the odds favor oil prices moving higher rather than lower over the next year," said J. Marshall Adkins in Raymond James's Houston office.
"The facts since 1999 support our view that [the Organization of Petroleum Exporting Countries] will do whatever it takes to support oil prices," he said in a Monday report. Since OPEC implemented in April 1999 the first in its recent round of production cuts, Adkins said, "US crude oil prices have averaged just over $27/bbl. In the past 12 months, US oil prices have averaged north of $30/bbl, well above the [Wall] Street and even our more aggressive forecast[s]."
Given seasonal swings in oil demand, Adkins said, OPEC members would need to cut current production by only 1 million b/d during the first half of 2002 "to maintain high-$20[/bbl] oil prices." Even after such a cut, OPEC production "would still be well above pre-Iraq war levels," he said.
The proposed reduction of OPEC production early next year is based on assumptions that Chinese oil demand grows by only 7%, or 400,000 b/d; there are no supply disruptions from Nigeria, Venezuela, or others; and Iraqi oil production returns to near-full capacity by yearend. Even so, Adkins said, more recent economic data suggest that growth in global demand for oil "could easily be double" Raymond James's current forecast of 900,000 b/d, or 1.1%.
International developments
As the energy futures markets awaited new signals Monday, officials at Merrill Lynch & Co. Inc., New York, reported "no shortage of developments over the weekend," including a warning from the International Atomic Energy Agency to Iran to provide information on that country's uranium-enrichment program, which is directly related to its ability to produce nuclear weapons.
With the attention of the US and the United Nations still focused on Iraq, Merrill Lynch analysts see little chance of military action against Iran, "which, for the oil markets, correlates to the lack of concern as yet" over possible disruption of Iranian oil exports of some 2.5 million b/d.
Meanwhile, analysts said, "Iraq's exports have not yet rebounded to a level capable of alleviating global supply pressures, which is a key reason for our thinking that [West Texas Intermediate crude remains] range-bound, with the bottom of the near-term band likely to be defined by $27.50-28[/bbl]."
Analysts reported, "The large commercials (who we think of as being the oil companies) have reduced their short hedges [in the oil futures market] by about 50 million bbl on the recent price pullback. The liquidation activity was expected with the commercials having taken a stance that recent plus-$32[/bbl] levels were a topping area."
Merrill Lynch also noted the continuing strike by white-collar oil workers in Nigeria, "though impacts to production and exports remain close to nil."
Energy prices
The October contract for benchmark US light, sweet crudes slipped by 3¢ to $28.85/bbl Monday on the New York Mercantile Exchange, while the November position advanced by 6¢ to $28.92/bbl. Unleaded gasoline for October delivery gained 0.18¢ to 86.33¢/gal, but heating oil for the same month lost 0.13¢ to 75.86¢/gal.
The October natural gas contract fell by 11¢ to $4.66/Mcf Monday on NYMEX. That contract is "near week-ago lows and appears destined to go even lower," said analysts Tuesday at Enerfax Daily.
"Some of the weakening market fundamentals were evident as the [US Energy Information Administration's] September short-term energy outlook showed that demand growth is projected to be flat during 2003, due to weakness in industry and sharply lower weather-related demand this summer," they said. "Next year, demand should remain flat as increases in industrial and commercial sector are canceled out by lower electric power sector demand, the EIA said. Production is expected to increase by about 2.4% in 2003, fueled by higher prices and sharply higher oil and gas field revenue. With no weather-driven demand and the industry's concerns over storage dissipating along with worries over tropical weather, traders see the market again losing strength."
In London, the October contract for North Sea Brent oil dipped by 4¢ to $27.17/bbl on the International Petroleum Exchange. The October natural gas contract slipped by 0.5¢ to the equivalent of $3.02/Mcf on IPE.
The average price of OPEC's basket of seven benchmark crudes gained 6¢ to $26.41/bbl Monday.
Contact Sam Fletcher at [email protected]