MARKET WATCHEnergy prices fall ahead of OPEC agreement to boost quota

Sam Fletcher
Senior Writer
HOUSTON, June 3 -- At a special meeting Thursday in Beirut, members of the Organization of Petroleum Exporting Countries hammered out a compromise agreement to raise their total crude production quota immediately by 2 million b/d, with another hike of 500,000 b/d starting in August. The group also agreed to meet again July 21 to review policy.

The quota hike apparently will put no new crude supplies into the market right away. OPEC exceeded its previous production quota by 2.3 million bbl in May (OGJ Online, June 1, 2004). "Despite its efforts, [Saudi] Aramco could only add one extra cargo for July delivery because it only had on offer Arab Heavy, a 28 gravity high sulfur (2.9%) grade with low gasoline yield," said analysts Thursday at Deutsche Bank AG, London.

Mixed reactions
Some analysts immediately dismissed the quota change as disappointing, after energy futures prices plummeted Wednesday as Saudi Arabia said it had already increased its production to 9.1 million b/d and the UAE promised to raise its output by 400,000 b/d. Analysts said the market had already factored into those lowered prices Wednesday the expectation of up to 2.5 million b/d increase in OPEC production.

However, Nauman Barakat of REFCO Group Ltd., LLC, New York, told Reuters news service Thursday, "Forget the promise of another 500,000[b/d], this is just plain 2 million [b/d]. The market was convinced it would get 2.5 million [b/d], so this could wave a red rag to the bulls." Energy futures prices were reported to be on the rise early Thursday.

Deutsche Bank analysts were more optimistic. "Actual OPEC production could rise by over 1.5 million b/d from May levels for at least part of the third quarter, thereby refilling inventories by taking OPEC output some 800,000 b/d above our (admittedly low) estimate of the third quarter call on OPEC," they said.

They speculated that Saudi Arabia "could probably do another 500,000 b/d, if markets warrant. A further 500,000 b/d of short-term response could come from the UAE (200,000 b/d), Kuwait (100,000 b/d), Qatar (100,000 b/d), and Iran (100,000 b/d) through inventive attention to storage and loading schedules."

Nevertheless, they noted, "Tense geopolitics and persistent US gasoline tightness that OPEC can't reverse in the near-term could stall the correction." Deutsche Bank analysts acknowledged, "The next steps could prove tricky, not least because terrorists seem to be successfully disrupting heavily-guarded compounds in the Kingdom."

Energy futures prices fall
The July contract for benchmark US light, sweet crudes plunged by $2.37 to $39.96/bbl Wednesday on the New York Mercantile Exchange, wiping out most of the previous session's jump of $2.45 to 21-year high of $42.33/bbl. The August contract lost $2.26 to $39.93/bbl Wednesday. On the US spot market, West Texas Intermediate at Cushing, Okla., was down by $2.40 to $39.95/bbl.

Gasoline for July delivery fell by 7.07¢ to $1.2823/gal Wednesday on NYMEX. Heating oil for the same month dropped 5.26¢ to $1.0115/gal. The July natural gas contract plummeted by 16.2¢ to $6.52/Mcf, "pressured by a sharp drop in crude oil prices and moderate weather forecasts for this weekend," said analysts Thursday at Enerfax Daily.

In London, the July contract for North Sea Brent crude fell by $2.22 to $36.86/bbl on the International Petroleum Exchange. Gas oil for June delivery lost $8 to $328.25/tonne. The July natural gas contract slipped by 4.7¢ to the equivalent of $3.84/Mcf on IPE.

The average price for OPEC's basket of seven benchmark crudes lost 84¢ to $36.80/bbl Wednesday.

Meanwhile, European Union finance administers agreed to coordinate efforts to reduce European gasoline prices, including a possible cut in the duties paid by retail customers for the fuel.

Contact Sam Fletcher at [email protected]