Market Journal

Oct. 2, 2006
The October contract for benchmark US light, sweet crudes fell $2.14 to $61.66/bbl Sept. 19, the lowest closing since Mar. 21 and the largest 1-day price drop since May 15 for a front-month contract on the New York Mercantile Exchange.

Crude prices test $60/bbl floor

The October contract for benchmark US light, sweet crudes fell $2.14 to $61.66/bbl Sept. 19, the lowest closing since Mar. 21 and the largest 1-day price drop since May 15 for a front-month contract on the New York Mercantile Exchange.

The fall followed a speech to the United Nations in which US President George W. Bush appeared to back away from trade sanctions against Iran over its uranium enrichment program. However, Kevin Book at Friedman, Billings, Ramsey Group Inc. (FBR), Arlington, Va., cautioned against “relying exclusively on the public words of a national leader trying to curry favor with a room full of diplomats; we saw a much stronger tone [against Iran’s nuclear program] articulated by the Department of State during a Senate hearing that took place immediately prior to the president’s UN address.”

Iranian President Mahmoud Ahmadinejad “may have seemed less inflammatory” in his response to Bush’s speech. “But it certainly was not suggestive of a truce,” Book said. “It is too soon to dismiss the Iran risk premium to crude oil. We agree that odds of an Iran-imposed embargo on its export oil appear to remain low (the US may be addicted to using oil, but Iran’s government is addicted to selling it, and Ahmadinejad will not win greater support from Supreme Leader Ali Khamenei by wrecking Iran’s economy). By the same token, we see several potential flash points for sanctions that could emerge from either multilateral (UN) negotiations or...the US Congress, and either one could prompt an escalation of Iranian rhetoric.”

The October crude contract expired at $60.46/bbl Sept. 20. On that same date, the November contract dropped $1.43 to $60.74/bbl, but it recovered to $61.59/bbl in the next trading session on NYMEX. “Oil seems to be stabilizing amid speculation that a $60 price may be the trigger-point for the Organization of Petroleum Exporting Countries to constrict supply,” said analysts in the Houston office of Raymond James & Associates Inc. on Sept. 22. The slight rebound in crude prices at the end of that week also was fueled by market suspicions that low refinery margins may induce companies to undergo larger-scale maintenance projects. “This is sparked by reports of multiple refinery shutdowns in Texas,” the analysts said

OPEC no longer has a specified target range of prices for its crude. However, Iran’s oil minister recently said he would like to see crude prices remain above $60/bbl.

The Energy Information Administration said US crude inventories fell 2.8 million bbl to 324.9 million bbl during the week ended Sept. 15. Gasoline stocks increased by 600,000 bbl to 207.6 million bbl, while distillate fuel inventories jumped by 4.1 million bbl to 148.7 million bbl. The average US refining margin “declined from a high of $23.50/bbl on Aug. 2 to $7.40/bbl as of Sept. 19 (the 2003-05 average was $10.70/bbl) due to rising inventories of refined products, which have increased by 9% since the beginning of May,” said Jacques Rousseau, senior energy analyst at FBR.

Gas prices retreat

Natural gas futures prices retreated on NYMEX through much of September because of a milder-than-expected hurricane season and a faster-than-normal build in US gas storage to nearly full capacity. On Sept. 21, the EIA reported the injection of 93 bcf of natural gas into US underground storage facilities in the week ended Sept. 15. That was above the consensus estimate of Wall Street analysts but down from the previous week’s injection of 108 bcf, with total US storage at almost 3.2 tcf. The October natural gas contract traded at $4.60-4.93/MMbtu Sept. 21 before closing at $4.78/MMbtu, down 15¢ for the day on NYMEX.

Robert S. Morris, Banc of America Securities LLC, New York, said, “We continue to believe that the near-term floor for natural gas prices will likely be set by parity with coal prices wherein some utilities could scale back coal-fired electric generation and switch to natural gas-fired units. Currently, a drop in natural gas prices to parity with coal, specifically Central Appalachian coal in the Northeast, would put Northeast prices at about $4.25-4.50/MMbtu, per our assessment, or a composite spot equivalent of $3.75-4/MMbtu.”

Some industry contacts indicated switching may have already occurred, with some utilities-mostly in the Midwest-“‘turning off’ their oldest and least efficient coal-fired plants in favor of starting up full-cycle natural gas-fired plants or purchasing natural gas-fired power generation on the open market, although the exact amount is hard to quantify,” Morris said.

If demand for less expensive natural gas increases while production decreases as US storage fills, gas supply may again tighten, analysts said.

(Online Sept. 25, 2006; author’s e-mail: [email protected])