MARKET WATCHEnergy prices rebound after Iran's refusal

July 12, 2006
Energy prices rebounded July 11 due to Iran's refusal to respond quickly to incentives offered for postponement of its uranium enrichment program.

Sam Fletcher
Senior Writer

HOUSTON, July 12 -- Energy prices rebounded July 11 due to Iran's refusal to respond quickly to incentives offered for postponement of its uranium enrichment program.

"Headline-driven reactions to developments involving Iran's nuclear program continue to have a major impact on market sentiment," said the Paris-based International Energy Agency in its monthly report released July 12. "Supply constraints remain in Nigeria, although Iraq's northern pipeline is providing additional supplies," it said.

Crude supplies from the Organization of Petroleum Exporting Countries increased by 200,000 b/d to 29.8 million b/d after Iraqi exports resumed from Ceyhan, Turkey (OGJ Online July 5, 2006). "OPEC capacity is seen rising by 300,000 b/d by end-2006 and a further 800,000 b/d in 2007. Inclusion of biofuel supply and weaker demand trim the 'call on OPEC crude and stock change' to 28.8 million b/d for 2006. The 2007 call on OPEC ranges between 28.4-29.2 million b/d when allowing for non-OPEC slippage and statistical differences," IEA reported.

Growth in world demand for oil products "is largely unchanged for 2006 at 1.21 million b/d," as weak second-quarter consumption among member countries of the Organization for Economic Cooperation and Development is counterbalanced by a strong Chinese market. "Demand projections for 2007 show growth of 1.57 million b/d based on recoveries in North America and Southeast Asia," said IEA.

The growth of crude supplies outside of OPEC is expected to accelerate to 1.7 million b/d in 2007 from 1.1 million b/d in 2006. IEA said non-OPEC supply, including biofuels, should average 53 million b/d next year, with countries from the former Soviet Union and Africa accounting for 60% of the growth, and the Americas for 30%. "New oil fields and an assumed rebound after severe 2005-2006 outages underpin the increase in 2007. The North Sea and OECD Pacific also [should] see a temporary respite in 2007 from recent declines," it said.

Price forecasts
Banc of America Securities LLC, New York, on July 12 raised its estimated spot oil price for West Texas Intermediate to $70.50/bbl for the second quarter from $68/bbl previously. Its third and fourth-quarter projections were increased to $72/bbl (from $64/bbl) and $66/bbl (from $65/bbl), respectively. "Our full-year 2006 WTI spot oil price forecast is now $68/bbl vs. $65/bbl previously and vs. [a Wall] Street consensus of $65.30/bbl. Our 2007 forecast is unchanged for now at $55/bbl," said analyst Robert S. Morris.

At the same time, Banc of America lowered its second-quarter composite spot natural gas price estimate to $6.15/MMbtu from $6.75/MMbtu "to match the actual average for the period." It also reduced its third-quarter projection to $5.75/MMbtu from $7/MMbtu and its fourth-quarter outlook to $6.75/MMbtu from $7.65/MMbtu. Its composite spot gas price forecast for 2006 is now $6.50/MMbtu, down from $7.15/MMbtu and vs. a Wall Street consensus of $7.80/MMbtu. Morris said, "Our full-year 2007 forecast is unchanged for now at $7.50/MMbtu. We would note that although our 2006 WTI spot oil to composite spot natural gas price forecast ratio is now 10.5-to-1, at this juncture, oil has lost the ability to set the floor for natural gas prices, and it is conceivable that natural gas prices, absent hurricane activity in the Gulf of Mexico or an extremely hot summer, could drop further to reach closer parity with coal prices."

The Energy Information Administration said July 12 that commercial US crude inventories plunged by 6 million bbl to 335.3 million bbl during the week ended July 7. Gasoline stocks dipped by 400,000 bbl to 212.7 million bbl during the same period. Distillate fuel inventories rose by 2.6 million bbl to 129.9 million bbl, with a large increase in ultralow-sulfur diesel fuel overcoming a slight decline in heating oil.

Imports of crude into the US fell by 920,000 b/d to 9.6 million b/d in that week. Input of crude into US refineries declined by 444,000 b/d to 15.5 million b/d, with refineries operating at 90.5% of capacity. Gasoline production dropped slightly to 9.2 million b/d, while distillate fuel production increased to 4.4 million b/d.

New data released from the OECD and IEA confirm that "contrary to much of the hype being published, gasoline demand in OECD countries is not growing," said Olivier Jakob, managing director of Petromatrix GMBH in Zug, Switzerland.

"This is the result of the continued structural switch to diesel cars in some European countries (and the reduction in the retail spread of gasoline to diesel in many countries will accelerate that move) as well as price impact on demand," he said. "There is still some growth in the US, but it is met by increased imports. Europe needs the US export outlet to offset its loss of demand. Europe has been somehow helped by the Katrina-led destruction in the US refinery system but will now face greater challenge as the US refinery system is coming back on line and Europe consumption continues to drop."

Energy prices
The August contract for benchmark light, sweet crudes gained 55¢ to $74.16/bbl July 11 on the New York Mercantile Exchange. The September contract advanced by 52¢ to $75.23/bbl. On the US spot market, WTI at Cushing, Okla., was up by 53¢ to $74.16/bbl. Heating oil for August delivery increased by 4.61¢ to $2.01/gal on NYMEX. Gasoline for the same month gained 1.78¢ to $2.19/gal.

The August natural gas contract increased by 2.5¢ to $5.63/MMbtu July 11 on NYMEX.

In London, the August IPE contract for North Sea Brent crude escalated by 78¢ to $73.67/bbl. Gas oil for July gained $8.75 to $637/tonne.

The average price for OPEC's basket of 11 benchmark crudes advanced by 20¢ to $68.10/bbl on July 11.

Contact Sam Fletcher at [email protected].