Sam Fletcher
Senior Writer
HOUSTON, June 11 -- Energy futures prices increased Tuesday as US Federal Reserve Chairman Alan Greenspan again warned of rising prices in a tight natural gas market before the House Energy and Commerce Committee.
However, prices for oil and petroleum products declined with light profit taking in overnight trading as ministers of the Organization of Petroleum Exporting Countries agreed to maintain their current 25.4 million b/d production quota that went into effect June 1. The ministers said they would meet again July 31 to reassess market conditions.
Government concerns
Greenspan "focused on the fundamentals driving higher natural gas prices . . . much of which is widely understood by the market: declining prospect sizes, higher depletion rates, decreasing (or at least slowing) imports from Canada, low current storage levels, limited LNG import infrastructure, and demand elasticity largely being limited to the industrial and (to a lesser extent) utility sectors," said William Featherston, an analyst at UBS Securities LLC, New York.
"Notably, Greenspan mentioned 'the long term equilibrium price for natural gas in the US has risen persistently during the past 6 years from approximately $2/MMbtu to more than $4.50/Mmbtu.' This is even more bullish than our recently increased 'normalized' natural gas price of $4/MMbtu," Featherston said.
Greenspan emphasized the need for increased LNG import capacity in the US as a "crucial safety valve" to maintain price stability. "Importantly, Greenspan said the diversity of stranded natural gas reserves around the world should mitigate any concerns regarding security of supply, while improvements in technology and a strong safety record should allay any concerns regarding the safety of import terminals," reported Robert S. Morris, an analyst at Banc of America Securities, New York.
"As many as 15 companies are currently pursuing over 20 greenfield LNG projects aimed at significantly increasing domestic import capacity. Although several of these projects have been slow to evolve, 7 projects are currently in the regulatory approval process in the US and Mexico," Morris said. "We believe 3-6 new terminals could be built in North America (including 1-3 in Mexico to primarily serve the Mexican market) by the end of this decade, compared with 4 terminals in operation currently (including Cove Point, Md., which is slated to begin operations this summer)."
As a result, he said, LNG could increase from a projected 2% of total US gas deliverability this year to 5% by 2006 and as much as 10% by 2010.
No immediate solutions
Analysts generally agreed that Greenspan and other witnesses who testified at the House hearing were short of near-term solutions to a pending US gas crisis.
Although Greenspan emphasized the necessity that "government policies be consistent," he "did not touch the political hot potato of needing to increase land access to producers, although he recognized that there are 'numerous unexploited sources of gas production in the US,'" said Featherston. "Importantly, Greenspan's speech did not mention any demand side solutions. This is particularly notable given speculation in recent weeks that the Administration might consider relaxing coal emission standards in an effort to reduce natural gas demand."
"The overall message from the presentations was clear: The US is facing an increasingly tight supply-demand situation for natural gas as producers struggle to grow domestic production while base demand is expected to rise," Morris said. "Importantly, there was a general agreement from all parties that the only way to bring the natural gas market into balance near-term is to 'back out' natural gas demand, most likely in the industrial sector."
An average 5.5 bcfd of gas demand must be backed out through October just to get US natural gas storage up to 2.8 tcf by Nov. 1, "which would be the second lowest level in the past 10 years," Morris said.
Greenspan's speech was positive for the exploration and production sector in that it highlighted the gas market fundamentals "to a much wider audience," without proposing "adverse demand or regulatory solutions," said Featherston.
However, he said, "Over the longer-term (2007 and beyond), we believe Greenspan's speech is bearish for the E&P sector given his emphasis on LNG as the primary supply growth in North America. Provided adequate regasification infrastructure, we believe LNG is economic at $3.50/MMbtu, while E&P companies require $4+ pricing to earn adequate returns today; by 2007, E&Ps may require higher gas prices given rising finding and developing costs to earn competitive returns just as a wave of LNG arrives."
Energy prices
Despite so much discussion of natural gas market problems, the July gas contract inched up only 1.6¢ to $6.33/Mcf Tuesday on the New York Mercantile Exchange after plunging by 19.6¢/Mcf in profit taking Monday. "Early selling (Tuesday) on a falling cash market and mild weather this week was offset by late buying" triggered by Greenspan's speech, analysts reported Wednesday at Enerfax Daily.
Other sources Wednesday said natural gas prices were slightly higher in narrow trading overnight.
The July contract for benchmark US light, sweet crudes advanced by 28¢ to $31.73/bbl Tuesday on NYMEX, while the August position gained 14¢ to $30.62/bbl. Gasoline for July delivery jumped by 2.06¢ to 91.71¢/gal. Heating oil for the same month was up 0.84¢ to 78.74¢/gal.
In London, the July contract for North Sea Brent oil rose 25¢ to $28.10/bbl on the International Petroleum Exchange. The July natural gas contract also increased by 1.2¢ to the equivalent of $2.84/Mcf on IPE.
The average price for OPEC's basket of seven benchmark crudes dipped by 2¢ to $27.51/bbl Tuesday while OPEC ministers were gathering for a Wednesday meeting in Doha, Qatar.
OPEC outlook
In April, the 10 active OPEC members, minus Iraq, voted to increase their total production quota to 25. 4 million b/d while vowing to reduce overproduction in what amounted to a net cut of 2 million b/d, effective June 1 (OGJ Online, Apr. 24, 2003). With Iraq's oil production still below prewar levels and oil prices near the high end of OPEC's targeted price range of $22-28/bbl, few experienced observers expected cartel members to take any action.
"Except for the announcement of another extraordinary conference at end (of) July, there were, in fact, no real surprises except perhaps for analysts who continue to profess the need for an immediate supply cut," said Michael Rothman and Steven A. Pfeifer, first vice-presidents at Merrill Lynch Global Securities Research & Economics Group, New York.
"All things considered, we're much more concerned with the prospects of a further over-tightening of the oil balance in the near term," they said.
In his speech at the opening of Wednesday's meeting, the Emir of Qatar, Sheikh Hamad Bin Khalifa Al Thani, noted that the falling value of the US dollar against the euro is a matter of global economic concern and has a negative impact on the purchasing power of major oil producing countries.
Contact Sam Fletcher at [email protected]
