MARKET WATCH Energy prices fall as US delays action on Iran

Feb. 3, 2006
Energy prices dropped Feb. 2 after US officials said they won't immediately ask the United Nations to impose trade sanctions against Iran in a dispute over noncompliance with nuclear treaty obligations.

Sam Fletcher
Senior Writer

HOUSTON, Feb. 3 -- Energy prices dropped Feb. 2 after US officials said they won't immediately ask the United Nations to impose trade sanctions against Iran in a dispute over noncompliance with nuclear treaty obligations.

The UN's International Atomic Energy Agency (IAEA) is expected to vote today to refer the matter to the UN Security Council. Permanent members of the council are the US, the UK, France, Russia, and China. The US and European Union have accused Iran of attempting to produce nuclear weapons behind the screen of a civilian nuclear power program.

"The US and its European allies finally persuaded Russia and China this week to back reporting Iran to the council by promising not to act against Iran until after the IAEA's director reports to the agency's regular meeting on Mar. 6," said analysts in the Houston office of Raymond James & Associates Inc. "The IAEA's board is weighted towards western countries, which means that referral is likely."

The Iranian government has threatened to end all cooperation with the IAEA if the matter is referred to the Security Council.

Meanwhile, Saudi Arabia apparently has taken umbrage at President George W. Bush's call during his state of the union address Jan. 31 for the US to replace 75% of its oil imports from the Middle East. The Saudi ambassador to the US said he would seek clarification from the White House.

Gulf Coast update
US Gulf Coast operations in the Gulf of Mexico are still recovering from the damage inflicted in August and September by Hurricanes Katrina and Rita. Officials at the US Department of Energy recently reported all crude and petroleum product pipelines affected by the hurricanes are back to normal operations.

BP PLC estimates its 446,400 b/d Texas City, Tex., refinery—damaged by Rita and an earlier explosion—will restart by the end of March. Murphy Oil Corp.'s 120,000 b/d Meraux, La., facility also is expected to resume operations by the end of March. ConocoPhillips restarted some units at its 247,000 b/d Belle Chasse, La., refinery.

On Jan. 26, the Louisiana Department of Natural Resources said 79,109 b/d, or 39%, of South Louisiana onshore crude production capacity remains shut in as does 612.5 MMcfd, or 27%, of natural gas production. A small number of gas processing plants in Louisiana with an aggregate capacity of 3.25 bcfd are still not operational.

Energy prices
The March contract for benchmark US light, sweet crudes fell by $1.88 to $64.68/bbl Feb. 2 on the New York Mercantile Exchange. The April contract lost $1.93 to $65.49/bbl. On the US spot market, West Texas Intermediate at Cushing, Okla., was down by $1.88 to $64.69/bbl. Gasoline for March delivery dropped 6.32¢ to $1.67/gal on NYMEX. Heating oil for the same month declined by 5.32¢ to $1.77/gal.

In London, the March contract for North Sea Brent crude plunged by $2.15 to $62.88/bbl on the International Petroleum Exchange. The February contract for gas oil lost $14.25 to $543.75/tonne.

The average price for the Organization of Petroleum Exporting Countries' basket of 11 benchmark crudes fell by $1.28 to $59.49/bbl.

Natural gas
The March natural gas contract dropped 37.6¢ to $8.35/MMbtu Feb. 2 on NYMEX, pulled down by tumbling oil prices, mild weather, and technical selling, said analysts at Enerfax Daily.

Despite a sharp decline in natural gas prices since December, the cost is still so high that it is shutting down some US industry. Potash Corp. recently shut down its Lima, Ohio, fertilizer plant, claiming the cost of natural gas is still too high to sustain output at a profit.

"The fertilizer industry is a good case study of the debilitating impact that high and volatile natural gas prices have on industrial production," said Ronald J. Barone, managing director of equity research for the Natural Gas & Electric Utilities Group of UBS Securities LLC, New York. "Producers in this gas-intensive sector are almost powerless to control production costs as gas prices rise, or plan for future production when prices are unpredictable. Exposure to gas prices is so high that shutting down production, oftentimes, is the safest hedging strategy."

Although fertilizer companies differ in the prices at which they shut, Barone said, "Volatile gas prices make them all hesitant to build excess fertilizer inventories, even when high demand for fertilizer in the spring planting season is just around the corner."

Contact Sam Fletcher at [email protected].