Crude prices dip below $59/bbl

Oct. 16, 2006
The November contract for benchmark US light, sweet crudes fell $2.35 to $58.68/bbl Oct. 3, the lowest front-month closing on the New York Mercantile Exchange since Feb. 16.

The November contract for benchmark US light, sweet crudes fell $2.35 to $58.68/bbl Oct. 3, the lowest front-month closing on the New York Mercantile Exchange since Feb. 16. But oil prices rallied upon reports that oil exporters informally agreed to cut production.

The Oct. 5 Financial Times reported that the Organization of Petroleum Exporting Countries informally plans to cut production by at least 1 million b/d, or at least 4%.

An OPEC spokesman said most member nations support a voluntary reduction, and that the change could be ratified during the cartel’s scheduled Dec. 14 meeting in Abuja, Nigeria. “OPEC is going to defend a price floor for its oil of $50-55/bbl,” FT reported an OPEC spokesman as saying.

But OPEC’s president denied reports of an informal agreement. Edmund Daukoru, Nigerian oil minister and OPEC president, told the Wall Street Journal, “We are toying with the idea of an emergency meeting. We will have to agree on how much, how soon, and how we distribute it among the member countries.” Daukoru said cartel members would not agree to a formal cut in production quotas until after OPEC had met. The production quota for OPEC, excluding Iraq, is 28 million b/d.

OPEC produced 27.7 million b/d in August, the US Energy Information Administration said. Iraq produced 2.2 million b/d in August but was not part of the quota.

Until the FT report, the markets appeared unconcerned about oil supply. Earlier in the week, traders showed little reaction to announcements that Nigeria cut oil production by 120,000 b/d and Venezuela by 50,000 b/d, effective Oct. 1.

The voluntary reductions in Nigeria and Venezuela’s production represented less than 1% of OPEC supply, and oil prices continued to decline despite those production cuts. Venezuela President Hugo Chavez suggested an “appropriate” oil price would be $50-60/bbl.

Analysts in the Houston office of Raymond James & Associates Inc. said front-month crude oil futures plunged more than 20% in just over 2 months. They cited an all-time closing high of $77.03 on July 14.

In both dollars and percentages, the overall fall of crude prices since July 14 marked the steepest sustained decline since late 2004 when oil fell to levels around $40/bbl from $55/bbl, RJA analysts said. “Recognizing that oil in [the fourth quarter] is likely to average below our $68/bbl forecast, we lowered it [on Sept. 25] to $62, but we again reaffirm our confidence in our $70 forecast for 2007,” RJA said.

Barclays Capital Inc. analyst Paul Horsnell foresses a “drawn-out stabilization” of oil markets. “We suggest that the best template for current circumstances is the experience of 2001-02,” Horsnell said. And [we] see the path as being determined by five main aspects: perceptions on the US economy, the global economy, non-OPEC supply, OPEC policy, and Iran.”

Natural gas

Natural gas prices on Oct. 5 marked a 5-week high, gaining 30.3¢ to close at $6.298/MMbtu on the NYMEX.

EIA reported a 73 bcf gas storage injection for the week ended Sept. 29 compared with a 77 bcf injection for the previous week, a 44 bcf injection last year, and the 5-year average injection of 68 bcf.

The year-over-year storage surplus rose to 398 bcf, and the 5-year average storage surplus increased to 366 bcf. Supplies are now at 3.3 tcf vs. 2.9 tcf last year.

Ronald J. Barone, UBS Securities LLC managing director, expects that EIA will report a 70-80 bcf injection into storage for the week ended Oct. 6. “Given current weather forecasts and year-earlier injection comparisons, we expect the year-over-year surplus will be in the 400-425 bcf range by the middle of October.”

The EIA weekly inventory report showed an increase in US fuel stockpiles, which was what traders had expected. On Oct. 4, EIA reported commercial US crude inventories rose by 3.3 million bbl to 328.1 million bbl during the week ended Sept. 29.

Gasoline stocks increased by 1.2 million bbl to 215.1 million bbl during the same period. Distillate fuel inventories rose by 200,000 bbl to 151.5 million bbl.

Imports of crude into the US averaged 10.5 million b/d, down 570,000 b/d from the previous week. During the last 4 weeks, crude oil imports have averaged 10.7 million b/d. Input of crude into US refineries declined by 573,000 b/d to 15.3 million b/d, with refineries operating at 89.9% of capacity.

Gasoline production dropped, averaging 8.9 million b/d while distillate fuel production fell slightly, averaging nearly 4.2 million b/d.

(Online Oct. 9, 2006; author’s e-mail: [email protected])