MARKET WATCHOil futures prices soar, wiping out previous losses

Reports of reduced output among members of the Organization of Petroleum Exporting Countries sent futures prices for oil and petroleum products soaring Friday, wiping out losses from the previous session when traders reacted to reports of rising US inventories.

June 23, 2003

4 min read

Sam Fletcher
Senior Writer

HOUSTON, June 23 -- Reports of reduced output among members of the Organization of Petroleum Exporting Countries sent futures prices for oil and petroleum products soaring Friday, wiping out losses from the previous session when traders reacted to reports of rising US inventories.

The last day of trading on the New York Mercantile Exchange for the July 2003 crude contract also added to the price volatility, analysts said.

OPEC outlook
"Recent tanker tracking reports suggest that the Saudis have cut back production sharply in June and that OPEC output for June may be near 26 million b/d. This is about the level . . . required to slowly move OECD (Organization for Economic Cooperation and Development) stocks from a 3% deficit to near-normal levels by yearend," said Stephen Smith, president and founder of Stephen Smith Energy Associates, Natchez, Miss. "If true, it is an encouraging sign that OPEC is being watchful on both fronts—making sure that there is enough oil to offset potential further delays in Iraq, but not producing so much as to create a yearend glut."

On Apr. 25, the 10 active OPEC members, minus Iraq, surprised world markets by raising their collective production quota by 900,000 b/d to 25.4 million b/d, effective June 1, essentially reducing their overproduction by 2 million b/d. On June 11, the OPEC-10 agreed to maintain that production quota at least until their next meeting at the end of July. In the interim, the invasion and occupation of Iraq by the US-led coalition has curtailed about 2 million b/d of oil exported to world markets from that country under an "oil for aid" program previously administered by the United Nations.

Iraq
Meanwhile, Smith reported Monday, "Iraq's return to pre-war production levels has been moving at a much slower pace than expected. While only a few wellheads were damaged during the war, post-war looting and sabotage have substantially slowed the pace of recovery. Setting up new marketing and procedural arrangements has also taken longer than expected."

Saboteurs blasted an Iraqi natural gas pipeline at Hit on Sunday and another oil pipeline early Monday near the border with Syria (OGJ Online, June 23, 2003). Explosions on the Kirkuk-Ceyhan oil pipeline on June 12, which US officials initially blamed on a gas leak, are now reported to be sabotage.

Earlier this month, Iraq's State Oil Marketing Organization (SOMO) awarded contracts for 9.5 million bbl of the 10 million bbl of oil in storage that it tendered last week, including oil stored in the Turkish port of Ceyhan. Exports of Iraqi oil at Ceyhan began Sunday, said Smith. As space in that storage terminal is freed, he said, production can be stepped up from Iraq's Kirkuk oil field.

Based on April-May data from the Paris-based International Energy Agency, however, Smith said, "It appears that Iraq's second quarter production will be roughly 300,000-400,000 b/d, which would not be sufficient to even meet Iraq's pre-war domestic demand of roughly 500,000 b/d.

Energy prices
The July contract for benchmark US sweet, light crudes jumped by 86¢ to $30.82/bbl Friday on NYMEX, while the new near-month August position shot up 97¢ to $29.48/bbl. Unleaded gasoline for July delivery soared 2.78¢ to 85.15¢/gal. Heating oil for the same month increased by 2.27¢ to 75.67¢/gal.

However, the July natural gas contract lost 13.6¢ to $5.81/Mcf Friday on NYMEX. That market was "pressured by pre-weekend profit taking after Thursday's 6% surge, despite a firmer cash (market) and warmer weather forecasts for this week," analysts reported Monday at Enerfax Daily.

In London, the August contract for North Sea Brent oil gained 73¢ to $27.02/bbl on the International Petroleum Exchange. The July natural gas contract lost 2¢ to the equivalent of $2.85/Mcf on IPE.

The average price for OPEC's basket of seven benchmark crudes was up 74¢ to $26.34/bbl Friday. For all of last week, however, OPEC's basket price averaged $26.17/bbl, down from an average $27.54/bbl the previous week.

So far this year, OPEC's basket price has averaged $28.18/bbl, up sharply from an average price of $24.36/bbl for all of 2002.

Contact Sam Fletcher at [email protected]