MARKET WATCHFutures prices continue mixed following OPEC decision

Energy futures prices were mixed Friday as markets adjusted to last week's decision by the Organization of Petroleum Exporting Countries to raise their production quota while reducing actual production by cutting back overproduction.

April 28, 2003

4 min read

Sam Fletcher
Senior Writer

HOUSTON, Apr. 28 -- Energy futures prices were mixed Friday as markets adjusted to last week's decision by the Organization of Petroleum Exporting Countries to raise their production quota while reducing actual production by cutting back overproduction.

"The latest meeting among OPEC members looked a lot like a Chinese fire drill," said J. Marshall Adkins, an analyst in the Houston office of Raymond James & Associates Inc., St. Petersburg, Fla. "OPEC created mass confusion in the market by officially cutting production by 2 million b/d from current levels while at same time increasing official production quotas by 900,000 b/d," Adkins reported Monday. "After the smoke had cleared (and oil prices had dropped $1/bbl [on Apr. 24, the day of OPEC's meeting]), a Saudi oil minister came out and reaffirmed that OPEC would make further cuts if necessary. . .."

Decision ill-timed?
"OPEC's decision to increase quotas to 25.4 million b/d was both ill-timed and badly executed, in our opinion," said Matthew Warburton, UBS Warburg LLC, NewYork, in a separate report Monday. "While substantial uncertainty remains over the timing and extent of the return of Iraqi (oil production and export) volumes, we believe OPEC should have reaffirmed the old quota of 24.5 million b/d and stressed its desire to adjust production levels to accommodate Iraq's return, while maintaining adequate supplies to world markets."

Warburton noted "the lack of apparent consensus among OPEC members ahead of the meeting." However, he said, "We expect crude prices to remain range-bound around current levels until June nominations are announced in early May."

"The US inventory situation remains extremely tight, with product inventories hovering around all-time lows. In fact, current total inventories support low-$30/bbl prices today," Adkins said Monday. "We expect US oil inventories to continue building as OPEC's overproduction and seasonal demand softness takes it toll."

However, other analysts said a reduction in OPEC's actual production means it will take longer to build up abnormally low US inventories of oil and petroleum products. Moreover, Adkins said, "We have heard reports that Saudi tanker loadings have recently dropped significantly. This, combined with the 2 million b/d of OPEC production cuts, should begin to taper (US) imports around mid-July."

Nonetheless, he said, "OPEC may have to deepen its cuts later this summer."

"These OPEC initiatives do not take into account any production from Iraq, which is not expected to begin to ramp up until June," said Robert S. Morris, Banc of America Securities LLC, New York, in yet another report Monday. "US military officials have said that Iraq's oil production could reach as high as 2 million b/d within the next 8 weeks, which would then largely offset the announced cuts by OPEC."

Market prices
The June contract for benchmark US light, sweet crudest lost 38¢ to $26.26/bbl Friday on the New York Mercantile Exchange, while the July position lost 25¢ to $26.10/bbl. Unleaded gasoline for May delivery gained 0.43¢ to 88.36¢/gal. Heating oil for the same month was down 0.7¢ to 76.6¢/gal.

The May natural gas contract inched up 0.3¢ to $5.48/Mcf Friday on NYMEX. "With the May contract expiring today, expect some volatility as traders clear their positions," analysts at Engraft Daily cautioned Monday.

"Despite the milder spring weather ahead, most traders expect longer-term bullish fundamentals like slipping production and near record low stocks to limit the downside heading into the summer cooling season," they said.

US natural gas storage now stands 891 bcf below year-ago levels. "Thus, based on our projections, for storage to just exceed 2.7 tcf at the beginning of next winter, more than 5 bcfd of demand must be 'backed out'. . .through October, on average, said Morris.

In London, the June contract for North Sea Brent oil lost 24¢ Friday to $24.09/bbl in volatile trading on the International Petroleum Exchange. The May natural gas contract dipped by 1.9¢ to the equivalent of $2.59/Mcf on IPE.

The average price for OPEC's basket of seven benchmark crudes gained 43¢ to $24.40/bbl Friday.

Over the whole week, however, OPEC's basket price averaged $25.52/bbl, down 9¢ from the previous week. So far this year OPEC's basket price has averaged $29.35/bbl, up from $24.36/bbl for all of 2002.

Contact Sam Fletcher at [email protected].