MARKET WATCH: Oil, gas futures post modest gains

Oil and gas prices inched higher Sept. 25 in a sluggish market with no major stimulus to push prices up or down.

Sam Fletcher
OGJ Senior Writer

HOUSTON, Sept. 28 -- Oil and gas prices inched higher Sept. 25 in a sluggish market with no major stimulus to push prices up or down.

Crude was flat in early trading Sept. 28 “despite the fact Iran began test firing missiles today that could hit Israel and US bases,” said analysts in the Houston office of Raymond James & Associates Inc. “These missile tests come right before talks between Iran and other…officials [from Russia, the US, China, the UK, France, and Germany] on Oct. 1 in Geneva. If Iran continues to refuse to suspend uranium enrichment, a slew of sanctions could be enforced. In the market's eyes, sluggish oil demand trumps a geopolitical risk premium,” they said.

Olivier Jakob at Petromatrix, Zug, Switzerland, said, “Iran admitting the construction of an additional [uranium] enrichment facility and its tests of missiles over the weekend will add to the importance of that [Oct. 1] meeting. The US currently has only one carrier in the region (the USS Nimitz), and while Israel has been extensively training for a strike on Iran we view the military option still as extremely remote given that the Powerful Six [developed nations] have much better options on their hands. Sanctions on gasoline exports to Iran have been widely discussed, but they are likely to be ineffective. Gasoline is easy to transport on trucks and barges and an embargo on gasoline exports to Iran would probably only fatten the wallets of the moonlight smugglers.”

On the other hand, Jakob said, “There has probably never been and probably never will be better conditions to impose sanctions on crude oil exports from Iran. The oil prices are relatively low. There is an overall low demand for crude oil, which is forcing the Organization of Petroleum Exporting Countries to limit production much below capacity. There is currently still a strong opposition movement in Iran. A UN declared embargo on Iranian crude oil exports would probably achieve much more than a military strike, would not provide an excuse for Iran to react military in the strait, and would not put the world’s economy recovery at risk. Iran exports about 2.4 million b/d and OPEC’s current production excluding Iran is about 3.3 million b/d below the levels of a year ago.”

Jakob added, “Up until now Iran has managed to escape tougher action from the UN Security Council thanks to the support of Russia and China. The US has, however, recently scrapped its plans of missiles implementation on Russia’s border, and it would probably only require less support to Georgia to have Russia in the US camp over Iran. China should be the largest question mark, but it is a good trader and will have little to gain from being the sole supporter of Iran in front of the Security Council.”

Meanwhile, the 2-day conference in Pittsburgh of financial ministers of 19 countries and the European Union concluded Sept. 25 without a unanimous call for support for the US dollar. “It appears they elected to skip this entirely at the meeting,” said analysts at Pritchard Capital Partners LLC, New Orleans. Without strong dollar rhetoric from the G-20 meeting, the analysts said, the dollar may continue to weaken and push energy prices higher this week.

On the natural gas front, Raymond James analysts said the October contract expires after trading today. “Prices are wavering just shy of $4/Mcf currently, while daily cash prices at Henry Hub cash closed at $3.60 Friday. With November's $1/Mcf contango, tomorrow the front-month contract will be $5/Mcf, a price we haven't seen in 9 months,” they predicted.

Pritchard Capital Partners said recent data indicate a gas supply reduction big enough to affect the market may not be far off. Initial checks indicate some operators have been able to get firm transportation quotas on the Appalachian natural gas pipeline. “In the recent past this was difficult to do. One E&P suggested that the pipeline capacity was available because [of] production declines,” analysts said.

Technological drilling boost
On the other hand, Raymond James analysts said, “Horizontal drilling with multiple [hydraulic fractures] has clearly been a game changer for the US natural gas industry. While we are already witnessing the tremendous gas supply effects of shale development, investors should understand that horizontal drilling also has the potential to give more traditional formations an economic boost. Already we are seeing this result with numerous conventional formation horizontal developments (like the Cotton Valley, the Granite Wash, and to a lesser extent, the Olmos Sands).”

However, they cautioned, “Keep in mind that shale gas production, which has been the primary user of horizontal drilling so far, only accounts for roughly 11% of US gas production. Therefore, a vast amount of the US's natural gas production still comes from vertical wells. Going forward, we expect to see the horizontal rigs continue to grow as a percentage of total rig count as more and more operators develop their non-shale asset base with horizontal rigs.”

In other news, the presidential amnesty in Nigeria is to end Oct. 4. “While there has been many militants embracing the amnesty and a considerable reduction in violence in the Delta, we will need to be on the watch once the deadline is over for a military operation to punish those that have not embraced the amnesty,” Jakob said. “Some militants have asked for an extension of the amnesty and this remains a possibility but one way or another we will need to focus a bit more on Nigeria going into next week.”

Energy prices
The November contract for benchmark US light, sweet crudes traded at $65.05-67.09/bbl Sept. 25 before closing at $66.02, up 13¢ for the day on the New York Mercantile Exchange. The December contract gained 4¢ to $66.42/bbl. On the US spot market, West Texas Intermediate at Cushing, Okla., was up 23¢ to $66.02/bbl, back in lock-step with the front-month futures contract price. Heating oil for October delivery dipped 0.43¢ to $1.68/gal on NYMEX. Reformulated blend stock for oxygenate blending (RBOB) for the same month declined 1.61¢ to $1.62/gal.

The October contract for natural gas rose 3¢ to $3.99/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., gained 1¢ to $3.60/MMbtu.

In London, the November IPE contract for North Sea Brent was up 29¢ to $65.11/bbl. Gas oil for October dropped $4.75 to $534.50/tonne.

The average price for OPEC’s basket of 12 benchmark crudes fell $1.12 to $64/bbl on Sept. 25. So far this year, the OPEC basket price has averaged $56.47/bbl.

Contact Sam Fletcher at samf@ogjonline.com.

More in Economics & Markets