MARKET WATCHOil futures prices plummet with profit taking

Sam Fletcher
Senior Writer

HOUSTON, Apr. 11 -- Futures prices for oil and petroleum products plummeted Thursday in a wave of profit taking that virtually wiped out the previous day's rally.

Analysts said it was a delayed reaction to the apparently quick victory of US-led forces in taking Baghdad. The market also was spurred by speculation among US military officials that oil fields in southern Iraq could be producing 200,000-800,000 b/d in less than the 3 months previously anticipated to bring Iraqi crude back to market.

The May contract for benchmark US light, sweet crudes plunged $1.39 to $27.46/bbl Thursday on the New York Mercantile Exchange, while the June position lost 99¢ to $26.74/bbl. Unleaded gasoline for May delivery fell 4.11¢ to 83.46¢/gal. Heating oil for the same month fell 2.68¢ to 71.61¢/gal.

In London, the May contract for North Sea Brent oil lost 78¢ to $24.47/bbl Thursday on the International Petroleum Exchange. The May natural gas contract dipped by 3.4¢ to the equivalent of $2.63/Mcf on IPE.

The average price for the Organization of Petroleum Exporting Countries' basket of seven benchmark crudes slipped by 19¢ to $25.40/bbl Thursday.

Gas market tightens
The May contract for natural gas jumped 22.4¢ Thursday on NYMEX, after the US Energy Information Administration reported the withdrawal of 9 bcf of gas from U.S. underground storage during the week ended Apr. 4, instead of the modest injection of gas expected by most analysts. US gas storage now stands at 671 bcf, down 820 bcf from the same period a year ago and 529 bcf below the 5-year average (OGJ Online, Apr. 10, 2003).

"Although this week marks the first week of the traditional 'injection season,' it is not altogether surprising to see withdrawals during the shoulder month of April, depending on how quickly spring temperatures arrive," Robert S. Morris, an industry analyst with Bank of America Securities, New York, reported Friday.

Morris foresees tighter gas supplies for the US market this year. He said the top 40 US gas producers replaced only 83% of their US gas production last year through drilling and extensions, excluding revisions. That compares with replacement rates of 115% in 2001 and a 5-year average of 98%.

"Including revisions, (US) natural gas reserve replacement was only 75% last year, compared with 98% in 2001 and a 5-year average of 101%," said Morris. Those negative reserve revisions "were not price-related, as natural gas prices at year-end 2002 were $4.60/MMbtu vs. $2.58/MMbtu at year-end 2001. Therefore, downward revisions last year reflected changes in domestic natural gas reserve estimates based on actual production data, decline rates, (and) reservoir modeling," Morris said.

"In 2000, (the amount of US) natural gas production added per (active) rig averaged 22 MMcfd for the base 500 rigs," said Morris. "However, this production rate has gradually declined, and we have concluded that (US) production added per natural gas rig last year dropped to nearly 18 MMcfd, on average, for the base 500 rigs."

Morris noted "a significant diminishing return factor" for the increased number of active rigs above the initial 500-rig base. "We estimate that the (amount of) production added per rig drops to 4 MMcfd for those rigs put to work above a rig count of 800," he said. There were 689 rigs, on average, drilling for natural gas in the US during 2002.

Hurricanes predicted
Meteorologists are predicting an active hurricane season in the gas-producing Gulf of Mexico this year, with the potential for 8 hurricanes, including 3 intense ones, and 12 named storms. That's up from 4 hurricanes, 2 of which were intense, and 12 named storms last year, Morris noted.

There's a 38% probability that a major hurricane will make landfall somewhere along the US Gulf Coast this year, he said, compared with an average 30% during the last 100 years. "According to the US Minerals Management Service, nearly 85 bcf, or nearly 0.5% of total 2002 US gas supply, was 'lost' due to hurricanes in the Gulf of Mexico last year," said Morris.

He projects a 2-3% drop in US gas production this year, apart from whether or not any offshore production is forced to be shut in because of hurricanes or tropical storms.

Contact Sam Fletcher at [email protected]