MARKET WATCHOil futures price rallied Friday, remain subject to volatility

Sam Fletcher
Senior Writer

HOUSTON, Apr. 14 -- Energy futures prices rallied Friday as traders reverted their attention from the apparently successful war in Iraq to the fundamentals of supplies and demand for oil.

"While crude prices remain subject to severe short-term volatility, the market attained short-term equilibrium late in the week," said analyst Matthew Warburton in a report issued Monday by UBS Warburg LLC, New York.

On one hand, Warburton said, traders "remain wary" of recently increased production by the other 10 members of the Organization of Petroleum Exporting Countries and the expected decline in world demand for oil in the second and third quarters of this year. Meanwhile, he noted, oil inventories among member countries of the Organization for Economic Cooperation and Development remain tight, with 50-51 days of forward demand cover currently.

"We expect OPEC's emergency meeting proposed for late April to mark a first step toward curbing recent overproduction," Warburton said. He said the latest tanker tracking data indicated "a material reduction" in estimated March oil exports from Saudi Arabia, down by 750,000 b/d to 8.5 million b/d. However, April exports from OPEC members minus Iraq are expected to be up by 500,000 b/d to 26.4 million b/d total. OPEC's 10 active members voted in March to maintain their official production quota at 24.5 million b/d (OGJ Online, Mar. 11, 2003), while Iraq was exporting about 2.2 million b/d under the United Nations-administered oil-for-aid program immediately prior to the war (OGJ Online, Apr. 7, 2001).

"Some OPEC members are calling for a reduction in output of up to 2 million b/d , while production exceeded current quotas by around 1.5 million b/d in March," said Robert S. Morris, with Banc of America Securities, New York, in a separate report Monday. "Expectations that OPEC will agree to reduce output in 2 weeks may help to stabilize oil prices in the mean time," he said.

"The expected timeframe to reestablish Iraq's (export) volumes is being extended gradually," said Warburton. Based on those factors, he forecast that crude prices would likely remain in the recent range of $25-30/bbl for benchmark US crudes.

Friday's closings
The May contract for those crudes gained 68¢ to $28.14/bbl Friday on the New York Mercantile Exchange, while the June position advanced 37¢ to $27.11/bbl. Unleaded gasoline for May delivery jumped by 1.58¢ to 85.04¢/gal. Heating oil for the same month was up 0.84¢ to 72.45¢/gal.

The May contract for natural gas inched up 0.8¢ to $5.41/Mcf on NYMEX "ahead of the weekend after light profit-taking in the morning session," said analysts Monday at Enerfax Daily. "Expect range-bound trading to continue this week, not moving too far overall. There is a warming trend this week, so there is not going to be a lot of demand."

In London, the May contract for North Sea Brent oil rose 28¢ to $24.75/bbl, while the June contract was up 29¢ to $24.77/bbl. The May natural gas contract fell 6.9¢ to the equivalent of $2.54/Mcf on IPE.

The average price for OPEC's basket of seven benchmark crudes lost 44¢ to $24.96/bbl Friday.

But for last week as a whole, OPEC's basket price plummeted by $1.23 to an average $25.34/bbl. So far this year, the OPEC price has averaged $29.90/bbl, including an average price of $30.55/bbl over the first 3 months of this year. For all of 2002, the OPEC price averaged $24.36/bbl.

Contact Sam Fletcher at [email protected]