MARKET WATCHHopes for Iranian settlement cut energy prices

June 8, 2006
Energy prices fell June 7 amid positive feedback from Iranian officials who said they will study proposals aimed at delaying their nuclear power program until the UN determine it will be used only for peaceful purposes.

Sam Fletcher
Senior Writer

HOUSTON, June 8 -- Energy prices fell June 7 amid positive feedback from Iranian officials who said they will study proposals aimed at delaying their nuclear power program until United Nations officials determine it will be used only for peaceful purposes.

Crude prices fell, dipping below $70/bbl June 8 in overnight electronics trading on reports that al Qaeda leader Abu Musab al-Zarqawi was killed in a bombing attack by US aircraft in Iraq. Al-Zarqawi was a key figure in kidnappings and suicide bombings and was blamed for videotapes of captive beheadings. "However, many analysts say that Iraq's oil sector may not draw much benefit from the death of al-Zarqawi," observed J. Marshall Adkins in the Houston office of Raymond James & Associates Inc.

Meanwhile, observers said the latest proposals from the five permanent members of the UN Security Council, plus Germany, are the most generous offer yet to Iran and would bring the US into direct talks with the Iranian government for the first time in 26 years since the US Embassy in Tehran was seized by Islamic revolutionaries (OGJ Online, June 7, 2006). French news sources reported Iran has until the end of June to accept that offer.

Energy outlook
In other news, the US Energy Information Administration said commercial US crude inventories increased by 1.1 million bbl to 346.6 million bbl in the week ended June 2 (OGJ Online, June 7, 2006). US gasoline stocks gained 1 million bbl to 210.3 million bbl. Distillate fuel inventories rose by 1.8 million bbl to 120.7 million bbl, with a large increase in ultralow-sulfur diesel fuel more than compensating for a decline in regular diesel fuel as heating oil inched higher.

Those latest figures "showed year-over-year gasoline demand growth remaining positive, despite near-record-high US average retail gasoline prices," said Jacques Rousseau, senior energy analyst at Friedman, Billings, Ramsey Group Inc., Arlington, Va.

Despite renewed hope for a negotiated settlement in Iran, the world crude market is "tight in terms of spare capacity and tightening further with strong demand and weak supply within the context of a significant increase of supply-side risks," said Paul Horsnell with Barclays Capital Inc., London. Risks of crude shortages and higher prices "appear to be gathering at the border like Attila's hordes. This is, in our view, a market that is currently far more likely to shock with a sharp upwards move [in prices] than it is likely to surprise with any sustainable sharp correction downwards," he said.

Natural gas
EIA reported June 8 the injection of 77 bcf of natural gas into US underground storage during the week ended June 2. That was below the consensus of Wall Street analysts and down from injections of 80 bcf the previous week and 105 bcf during the same period in 2005. US gas storage now exceeds 2.3 tcf, which is up by 452 bcf from a year ago and 678 bcf above the 5-year average.

However, Adkins noted "the conspicuous arrival of a summer that is significantly hotter than the same period last year (on a cooling degree day basis)." On that basis, US temperatures last week were 120% warmer than a year ago, 78% warmer than the prior week, and 44% warmer than the 10-year average.

"Electricity and natural gas demand has risen visibly, and the injection estimate is low relative to last year. This may be a bullish catalyst for natural gas," said Adkins.

Energy prices
The July contract for benchmark US sweet, light crudes dropped $1.68 to close at $70.82/bbl June 7 on the New York Mercantile Exchange. The August contract lost $1.61 to $71.50/bbl. On the US spot market, West Texas Intermediate at Cushing, Okla., was down by $1.68 to $70.82/bbl. Gasoline for July delivery dropped 5.48¢ to $2.12/gal on NYMEX. Heating oil for the same month lost 4.72¢ to $2/gal. The July natural gas contract fell by 41.1¢ to $5.97/MMbtu.

In London, the July IPE contract for North Sea Brent crude lost $1.62 to $69.19/bbl. The June gas oil contract retreated by $3.25 to $625/tonne.

The average price for the Organization of Petroleum Exporting Countries' basket of 11 benchmark crudes dropped 50¢ to $65.43/bb on June 7.

Contact Sam Fletcher at [email protected].