MARKET WATCHTerrorist scare undermines energy prices

Sam Fletcher
Senior Writer

HOUSTON, Aug. 11 -- A terrorist plot thwarted by UK authorities, targeting commercial airline flights en route to the US, dropped energy prices on Aug. 10 back to levels before BP PLC announced plans early this week to shut in its Prudhoe Bay oil field, the largest in the US.

Traders dumped their energy holdings for fear that the latest terrorist scare will curb travel plans, reducing demand for both jet fuel and gasoline. Speculators also used the occasion to take profits from the recent run up in energy prices following news that at least 200,000 b/d of Prudhoe Bay's 400,000 b/d of crude production was to be shut in while BP repaired corrosion in sections of 22 miles of transit pipeline that connects the field to the Trans-Alaska Pipeline System.

"However, we do not expect a material change [in world demand for crude in 2006-07], as the plot was foiled and European jet fuel consumption only accounts for about 8% of total crude oil consumption in that region," said Jacques Rousseau, senior energy analyst at Friedman, Billings, Ramsey Group Inc., Arlington, Va.

In an Aug. 11 report, the International Energy Agency in Paris reduced its 2006 non-OPEC supply forecast by 220,000 b/d and its US oil supply forecast by 300,000 b/d for the rest of this year as a result of the Prudhoe Bay shutdown. It left its global crude oil demand growth forecast effectively unchanged, calling for 1.2 million b/d (1.4%) increase in crude consumption during 2006 and a 1.6 million b/d (1.9%) increase in 2007.

"The IEA believes that Asian, South American, and Saudi Arabian producers may help fill suspended supply from the US. However, the agency has also raised its 2006 Chinese oil demand growth forecast from 6.1% to 6.5%," said analysts at the Houston office of Raymond James & Associates Inc.

Meanwhile, Royal Dutch Shell PLC said oil is flowing again through a pipeline in the troubled Niger Delta area of Nigeria. Shell declared force majeure on 180,000 b/d of Nigerian crude production in late July because of an unexplained leak in that pipeline.

Natural gas
Meanwhile, the US Energy Information Administration said Aug. 10 that 12 bcf of gas was withdrawn from US underground storage during the week ended Aug. 4. That marked only the second time in history that gas has been withdrawn in the summer fill season (OGJ Online, Aug. 10, 2006). Yet the September natural gas contract lost 12.2¢ to $7.53/MMbtu on the New York Mercantile Exchange, "because many investors bought on rumor and sold on news" of the larger-than-expected withdrawal, said Raymond James analysts. Record low temperatures also are expected in the Northeast over the weekend, reducing electrical demand for cooling.

Meanwhile, many weather forecasters have scaled back their hurricane forecasts for the Gulf of Mexico because of cooler ocean temperatures and a persistent upper-air wind shear pattern, said Ronald J. Barone, UBS Securities LLC, New York.

Other energy prices
The September contract for benchmark US sweet, light crudes dropped $2.35 to $74/bbl Aug. 10 on NYMEX, the biggest decline in a front-month crude contract since mid-May. The October contract fell by $2.03 to $75.50/bbl.

On the US spot market, West Texas Intermediate crude at Cushing, Okla., was down by $2.35 to $74.01/bbl. Unleaded gasoline for September delivery plunged by 18.33¢ to $1.99/gal—the lowest closing for a front-month gasoline contract since early April. Heating oil for the same month fell by 8.13¢ to $2.03/gal.

In London, the September IPE contract for North Sea Brent crude lost $2 to $75.28/bbl. Gas oil for August was unchanged at $668.75/tonne.

The average price for the Organization of Petroleum Exporting Countries' basket of 11 benchmark crudes dropped $1.60 to $70.94/bbl on Aug. 10.

Ethanol supplies
The US Department of Agriculture raised its 2006-07 corn crop forecast by 236 million bushels to just under 11 million, which "underscores the trend of improving corn crop yields and the crop's increased resilience in the face of challenging weather conditions," said Rousseau. "The administration also lowered its forecast corn price range for the year."

He said, "A conversion rate of 2.8 gal of ethanol per bushel suggests total ethanol production of roughly 6 billion gal during the harvest year, which is in line with our own ethanol production volume forecasts."

Contact Sam Fletcher at [email protected].