MARKET WATCHEnergy futures prices waffle in listless markets

Sam Fletcher
Senior Writer

HOUSTON, July 30 -- Energy futures prices continued to waffle in light and relatively listless trading Tuesday as traders awaited the latest reports this week on US oil and gas inventories, as well as Thursday's meeting in Vienna of ministers of the Organization of Petroleum Exporting Countries.

World oil markets have already factored into current prices the general expectation that OPEC members will maintain production quotas at current levels, analysts said. However, some said reports late Tuesday that Iraq has increased its oil production to 1 million b/d could trigger additional sales of oil commodities.

Iraq's oil production previously was projected at 300,000-400,000 b/d for the second quarter of 2003. Shortly before its invasion by US-led coalition forces, Iraq's oil production had fallen to 2.7 million b/d from its pre-1990 capacity of 3.5 million b/d. Iraq's prewar domestic demand was roughly 500,000 b/d (OGJ Online, July 1, 2003).

New York prices
The September contract for benchmark sweet, light crudes gained 13¢ to $30.24/bbl Tuesday on the New York Mercantile Exchange, while the October position advanced by 10¢ to $29.83/bbl. Heating oil for August delivery gained 0.41¢ to 77.79¢/gal. Tuesday's gains on each of those three contracts wiped out the previous day's losses.

However, the October contract for unleaded gasoline continued to slide, down 0.53¢ to 88.84¢/gal Tuesday. The American Petroleum Institute reported Tuesday that the average US retail price for all types of gasoline decreased by 0.8¢ to $1.56/gal as of July 28. "Gasoline prices are now 21¢/gal less than when they peaked in mid-March at $1.77/gal, but still about 11¢/gal more than at this time last year," API said.

The August natural gas contract lost 0.7¢, expiring Tuesday at $4.69/Mcf on NYMEX. That was "the lowest expiration (gas price) of the year," analysts at Enerfax Daily reported Wednesday. Last month, the July natural gas contract expired at $5.29/Mcf, with the August contract assuming the prompt month position at $5.32/Mcf. By expiration, the August contract had lost just under 12% of that earlier price. The September gas contract fell 2.7¢ to $4.64/Mcf Tuesday.

The low expiration price for the August gas contract "really reflected the amount of weakness in the market and the lack of weather fundamentals," said Enerfax analysts, who still see "room for even lower prices." They expect the NYMEX gas futures market to continue "listlessly" until the US Energy Information Administration's next report on US gas storage. That report, due Thursday, is expected to show injections last week of 80-90 bcf of gas into US underground storage, they said.

Stephen A. Smith, founder and president of Stephen Smith Energy Associates, Natchez, Miss., earlier predicted an injection figure of 85 bcf for the week ending July 25, which would boost US gas storage above 2 tcf. That estimate "would have been 79 bcf on a weather-normalized basis, as compared with our 1994-1998 norm of a 70 bcf build. If this turns out to be correct, it would mean a weather-normalized deficit reduction of 9 bcf/week—by far the most bullish storage behavior (with respect to gas prices) in months," he said.

A 9 bcf deficit reduction "would suggest that lower gas prices are finally resulting in the recapture by gas of markets lost in May and June" to less expensive alternative fuels, said Smith. That lower rate of deficit reduction might imply a trading range of $4.50-5/Mcf for gas "for a few weeks," he said.

"Within this trading range (and with close-to-normal weather), upward price pressure would be gradually building, since a weather-normalized deficit closure pace of 9 bcf/week would not get storage to normal target levels (of 3 tcf) by Nov. 1," said Smith.

Other energy prices
In London, the September contract for North Sea Brent oil increased by 7¢ to $28.10/bbl Tuesday on the International Petroleum Exchange. The expiring August natural gas contract lost 3¢ to the equivalent of $2.73/Mcf on IPE, while the September contract was down 2.3¢ to the equivalent of $2.69/Mcf.

The average price for OPEC's basket of seven benchmark crudes gained 16¢ to $27.18/bbl Tuesday.

Contact Sam Fletcher at [email protected]