MARKET WATCHCrude futures price slips to 5-month low

Sam Fletcher
Senior Writer

HOUSTON, Sept. 8 -- Energy prices continued to slip Sept. 7, with the near-month crude contract dropping to a new 5-month low near $67/bbl on the New York market after BP PLC said it plans to bring all of the Prudhoe Bay oil field back on production by the end of October.

That move depends on approval by the US Department of Transportation of BP's plans to replace or bypass corroded sections of a transit pipleline connecting that field with the Trans-Alaska Pipeline system.

"As we near the end of one of the most bearish weeks in natural gas and crude oil in the last few months, a couple of items are still on the radar screen: (1) a potential resolution with Iran and (2) continued hurricane threats on the Gulf of Mexico," said J. Marshall Adkins in the Houston office of Raymond James & Associates Inc. "Both factors are currently bearish (near-term sanctions on Iran are increasingly unlikely, and hurricane threats have eased for now). However, hurricane season still has 2 months to go, and negotiations with Iran are still in the balance. In related news, OPEC is likely to keep production at current levels when it convenes next week, which increases the chances that crude oil will remain above $65 for the remainder of 2006," he said.

Tropical Storm Florence is still in the Atlantic and could become a hurricane in the next few days. It is expected to reach Bermuda early next week but presently poses no treat to oil and gas production in the Gulf of Mexico.

Colorado State University hurricane forecasters recently reduced their 2006 Atlantic Basin forecast by two storms. The new forecast calls for a total of 13 named storms, 5 hurricanes, and 2 major Category 3 or higher hurricanes. They previously predicted 15 named storms, 7 hurricanes, and 3 intense hurricanes.

Arctic gas outlook
Meanwhile, two major pipeline projects that could deliver more gas to the US are "caught up one way or another in bureaucracy that threatens to delay their completion dates, if not terminate the projects altogether," said Ronald J. Barone, UBS Securities LLC, New York. He blames "politics and other federal red tape" with delaying industry attempts to connect abundant gas reserves in Alaska's North Slope and the Canadian Arctic—estimated at 35 tcf and 63 tcf, respectively—with Lower 48 markets.

"The Alaskan gas pipeline suffered a setback when [Alaska] Gov. Frank Murkowski failed to get past the Republican primary in his run for a second term. He now stands little chance of renewing the fight to get his version of the project's contract past the legislature before he leaves office in December. Moreover, whatever chance he may have had was further jeopardized due to a federal investigation into the improper lobbying activities of oil field services company VECO [Corp., Anchorage], and its relationship with several Alaskan legislators working on the project's negotiations, as well as its tax legislation," Barone said. VECO has denied any illegal or improper conduct on the part of the company or its executives.

"The Mackenzie Gas Project on the other hand—expected to supply 1.2-1.9 bcf/d from Canada's Arctic gas reserves to Canadian and US markets—is being held up in regulatory approval delays," said Barone. "A Canadian Joint Review Panel recently decided to extend public hearings on the project. The project must then pass through Canada's National Energy Board before work on the pipeline can begin. According to one of the project's sponsors, Imperial Oil [Ltd., Calgary], the delay will negatively impact the project's startup date and cost. Currently estimated at $6.7 billion, increased competition for labor and materials and loss of market share could cost the pipeline's total cost to rise to $9 billion, according to a spokesman for the company."

Energy prices
The October contract for benchmark US light, sweet crudes traded at $66.76-67.98/bbl Sept. 7 before closing at $67.32/bbl, down 18¢ for the day on the New York Mercantile Exchange. The November contract lost 20¢ to $68.50/bbl.

On the US spot market, West Texas Intermediate at Cushing, Okla., was down by 18¢ to $67.33/bbl. Heating oil for October delivery declined by 2.34¢ to $1.89/gal. Unleaded gasoline for the same month inched up by 0.17¢ but remained virtually unchanged at $1.64/gal on NYMEX.

"The spread between heating oil and gasoline is pricing at historic low levels," said Olivier Jakob, managing director of Petromatrix GMBH, Zug, Switzerland. "The gasoline season has not seen any storm disruptions, imports have stayed high, and the transition to ethanol-based gasoline has not brought a system breakdown. Disappointed with gasoline, the market has now put its hope on middle distillate. This has resulted in a major correction of the gasoline to heating oil spread."

The October natural gas contract fell by 27.6¢ to $5.72/MMbtu on NYMEX, the lowest closing price in 7 weeks as recent mild weather has allowed utilities to build winter inventories, said analysts at Enerfax Daily.

In London, the October IPE contract for North Sea Brent crude dropped 40¢ to $66.53/bbl. The September gas oil contract fell by $10.75 to $601.75/tonne.

The average price for the Organization of Petroleum Exporting Countries' basket of 11 benchmark crudes lost 43¢ to $62.84/bbl on Sept. 7.

Contact Sam Fletcher at [email protected].