MARKET WATCHEnergy prices tumble as Iraq resumes crude exports

Sam Fletcher
Senior Writer

HOUSTON, Aug. 25 -- Energy prices continued to tumble Tuesday with reports that Iraq's oil exports are now at the highest level since early 2003.

Iraqi officials reactivated a primary southern pipeline, increasing that country's crude exports to 1.8 million b/d from 1 million b/d previously. That pipeline was shut down 2 weeks ago because of threats by insurgents. Iraq also is now moving 450,000 b/d of crude from the Kirkuk field through a recently repaired northern pipeline to the Mediterranean port of of Ceyhan, Turkey (OGJ Online, Aug. 24, 2004).

Increased exports of Iraqi crude triggered an avalanche of sales orders in the top crude futures markets, analyst reported. The downturn also was encouraged by claims by officials of the Organization of Petroleum Exporting Countries and others that oil prices had become "divorced from the reality" of supply and demand, they said.

But as crude prices retreat from an all-time high of $49.40/bbl in interday trade last Friday on the New York Mercantile Exchange, "they are very unlikely to return to $17-20/bbl," said Bernard J. Picchi, senior managing director of Foresight Research Solutions LLC, New York. Like many others, he expects oil prices to escalate again in the next "inevitable" Middle East crisis.

"Even if oil were to hit $50/bbl, it wouldn't tank the US economy," Picchi reported Wednesday. "Gasoline would have to rise to $5.75/gal to have the same impact today as it did on the more energy-intensive economy of 1980." Adjusted for inflation in terms of 2004 dollars, he said, "Crude prices hit a peak of nearly $80/bbl in 1981, and gasoline crested at $3.10/gal in 1980. We still have a long way to go before exceeding those benchmarks."

Meanwhile, consumers "cannot depend on either OPEC or Russia to restore a margin of spare production capacity to soothe the jangled nerves of the West's oil buyers," he said. Instead, the world must seek other energy sources. "This will be the decade of alternative energy development. LNG, gas-to-liquids, tar sands, wind power, biomass, and other alternative energies will be to the present era what Alaska and the North Sea were to the '70s and '80s: a major new source of energy that will eventually loosen the grip of OPEC and high oil prices. This will not happen overnight," Picchi predicted.

Energy prices
The October contract for benchmark US light, sweet crudes dropped by 84¢ to $45.21/bbl Tuesday on NYMEX, while the November contract fell by 85¢ to $44.86/bbl. On the US spot market, West Texas Intermediate at Cushing, Okla., plunged by $1.09 to $45.61/bbl.

Heating oil for September delivery lost 2.13¢ to $1.1934/gal. Gasoline for the same month dipped by 0.28¢ to $1.2603/gal. However, the September natural gas contract inched up by 2.8¢ to $5.34/Mcf "on [investment] fund buying as the market took a breather on its way down to $5[/Mcf]," said analysts Wednesday at Enerfax Daily.

In London, the October contract for North Sea Brent crude declined by 71¢ to $42.32/bbl on the International Petroleum Exchange. Gas oil for September delivery fell by $8.25 to $384.25/tonne. But the September natural gas contract escalated by 19.5¢ to the equivalent of $4.45/Mcf on IPE.

The average price for OPEC's basket of seven benchmark crudes was down by 84¢ to $41.43/bbl Tuesday.

Contact Sam Fletcher at [email protected]