MARKET WATCHOPEC's call to reduce production boosts energy futures prices

Sam Fletcher
Senior Writer

HOUSTON, May 12 -- Energy futures prices continued to rally Friday as some members of the Organization of Petroleum Exporting Countries called for another cut in their production quotas at their scheduled June meeting in Doha, Qatar.

OPEC Conference Pres. Abdullah bin Hamad Al Attiyah, who is also the Qatari energy minister, was quoted in France's Le Monde newspaper as saying too much oil on the market that is adversely affecting prices. Al Attiyah said OPEC would agree to new output reductions in June, but he said the cartel is looking for support from other major oil producers, including, Russia, Mexico, Norway, and Angola.

Concerns over Iraq
The rise in oil prices last week also was pushed by growing concern that US oil imports will decline in coming weeks as the final prewar shipments of Iraqi crude reach their destinations, said Robert S. Morris, a veteran analyst at Banc of America Securities, New York. "It takes 6 weeks for tankers from the Persian Gulf to arrive in the US," he noted in a Monday report.

Meanwhile, Morris said Iraqi oil facilities have been damaged—not by the war, as many had anticipated, but by the unexpected massive looting by Iraqi residents in the wake of the overthrow of Saddam Hussein by US-led coalition forces. As a result, he said, "Production from Iraq may not be fully restored until January, 6 months later than previously expected."

The rise in oil prices also pulled up US gas futures prices last week, said Morris. US market fundamentals for natural gas are strong over the long term, he said. But in the near term, Morris said, "Any drop in oil prices can still influence natural gas prices, given that there still exists . . . 1-1.5 bcfd of fuel switching that can occur."

Once all of the switching from high-priced natural gas to lower priced fuel oil and distillate occurs at plants with dual-fuel capabilities, Morris said, "We believe that natural gas and crude oil prices will further decouple, given the tight supply-demand fundamentals for natural gas, and that composite spot natural gas prices will average at least $5.50/MMbtu, or perhaps higher, for the year."

Conference confidence
J. Marshall Adkins, an analyst in the Houston office of Raymond James & Associates Inc., St. Petersburg, Fla., drew confidence from the annual Offshore Technology Conference in Houston, where attendance May 5-8 hit an 18-year high of 50,655 from more than 110 countries, up from 49,620 last year. "We believe this is evidence of the view from most in the oil patch that activity levels are likely to recover steadily over the next several quarters," Adkins reported Monday.

"Maybe an even more telling statistic is that the number of exhibiting companies (almost 2,000) at the conference remained at the highest level since 1983," he said, although "consolidation among service companies has clearly reduced the number of medium-sized, technology-oriented oil service companies."

Most of the technology showcased at the petroleum industry's largest conference and exhibition last week were "evolutionary, not revolutionary," Adkins noted. And he warned investors that oil companies are "notoriously slow at adopting new technologies." As a result, he said, "Most of the new technologies highlighted at OTC will have little meaningful earnings impact on our companies over the next year."

Energy prices
The June contract for benchmark US light, sweet crudes gained 74¢ to $27.72/bbl Friday on the New York Mercantile Exchange. The July contract increased 58¢ to $27.33/bbl. Unleaded gasoline for June delivery jumped by 2.55¢ to 83.39¢/gal. Heating oil for the same month was up 0.92¢ to 71.89¢/gal.

The June natural gas contract rose 3.4¢ to $5.81/Mcf Friday on NYMEX. Analysts at Enerfax Daily reported Monday at gas futures prices "bounced up and down inside an 11¢ range Friday," until local distribution companies began nervously buying commodities to close out short sales near the end of the session. That demonstrated "an edginess and a lack of focus in the market," analysts said. "Many traders feel the market is going higher, but for now, participants are skittish, afraid to take a position."

In London, the June contract for North Sea Brent oil gained 45¢ to $25.10/bbl Friday on the International Petroleum Exchange. However, brokers claimed that rise was not driven by market fundamentals and that prices are unlikely to remain above $25/bbl if bullish market indicators appear.

The June natural gas contract increased by 4.9¢ to the equivalent of $2.67/Mcf on IPE.

The average price for OPEC's basket of seven benchmark crudes was up 70¢ to $25.14/bbl Friday.

For all of last week, OPEC's basket price averaged $24.01/bbl, up 22¢ from the previous week's average. So far this year, OPEC's basket price has averaged $28.74/bbl, up from an average of $24.36/bbl for all of 2002.

Contact Sam Fletcher at [email protected]