Holiday week called 'bearish'

Sept. 11, 2006
The abbreviated business week of Sept. 5-8 was "one of the most bearish" periods in recent months for the natural gas and crude futures markets, said analysts.

Sam Fletcher
Senior Writer

The abbreviated business week of Sept. 5-8 was "one of the most bearish" periods in recent months for the natural gas and crude futures markets, said analysts as New York crude prices sank to 5-month lows approaching $66/bbl after the Sept. 4 Labor Day holiday marking the end of the US summer driving season.

"The spread between heating oil and gasoline is pricing at historic low levels," said Olivier Jakob, managing director of Petromatrix GMBH, Zug, Switzerland. "The gasoline season has not seen any storm disruptions, imports have stayed high, and the transition to ethanol-based gasoline has not brought a system breakdown. Disappointed with gasoline, the market has now put its hope on middle distillate. This has resulted in a major correction of the gasoline to heating oil spread."

Crude traders were relieved as BP PLC said it would restore all Prudhoe Bay production by the end of October, pending approval by the US Department of Transportation of plans to replace or bypass corroded portions of a transit pipeline.

"The two critical factors underpinning the ultimate path for oil prices should be the strength of the US and global economies and the extent of global geopolitical tensions, most notably the nuclear standoff with Iran," said Robert S. Morris, Banc of America Securities LLC, New York. "Perhaps most surprising has been the resiliency of US gasoline demand with prices remaining above 3% of per-capita disposable income since late-March. Importantly, although the US economy does appear to be decelerating, it is not an abrupt slowdown and continues to expand," he said.

Meanwhile, United Nations sanctions against Iran are "increasingly unlikely," said J. Marshall Adkins in the Houston office of Raymond James & Associates Inc. "Militaristic efforts to curb Iran's uranium enrichment are not seen as a viable option for the adverse impact they might have on the oil production from the world's fourth-largest oil producer. Sanctions may be imposed instead, as Iran failed to meet an Aug. 31 deadline to halt the enrichment," he said.

Elsewhere, Tropical Storm Florence was expected to build into a hurricane as it churned through Atlantic waters toward Bermuda. By the end of the week it posed no real threat to oil and gas production in the Gulf of Mexico. Although hurricane season still has 2 months to go, Colorado State University hurricane forecasters reduced their 2006 Atlantic basin forecast by two storms. The new forecast calls for a total of 13 named storms, 5 hurricanes, and 2 major Category 3 or higher hurricanes. They previously predicted 15 named storms, 7 hurricanes, and 3 intense hurricanes.

Arctic gas outlook
Two major pipeline projects that could deliver more natural gas to the US are "caught up one way or another in bureaucracy that threatens to delay their completion dates, if not terminate the projects altogether," said Ronald J. Barone, UBS Securities LLC, New York. He blames "politics and other federal red tape" with delaying industry attempts to connect abundant gas reserves in Alaska's North Slope and the Canadian Arctic—estimated at 35 and 63 tcf, respectively—with Lower 48 markets.

"The Alaskan gas pipeline suffered a setback when (Alaska) Gov. Frank Murkowski failed to get past the Republican primary in his run for a second term. He now stands little chance of renewing the fight to get his version of the project's contract past the legislature before he leaves office in December. Moreover, whatever chance he may have had was further jeopardized due to a federal investigation into the improper lobbying activities of oil field services company VECO [Corp., Anchorage,] and its relationship with several Alaskan legislators working on the project's negotiations, as well as its tax legislation," Barone said. VECO has denied any illegal or improper conduct on the part of the company or its executives.

"The Mackenzie Gas Project on the other hand—expected to supply 1.2-1.9 bcfd from Canada's arctic gas reserves to Canadian and US markets—is being held up in regulatory approval delays," said Barone. "A Canadian joint review panel recently decided to extend public hearings on the project. The project must then pass through Canada's National Energy Board before work on the pipeline can begin. According to one of the project's sponsors, Imperial Oil [Ltd., Calgary], the delay will negatively impact the project's start-up date and cost. Currently estimated at $6.7 billion, increased competition for labor and materials and loss of market share could cost the pipeline's total cost to rise to $9 billion, according to a spokesman for the company."

(Online Sept. 11, 2006; author's e-mail: [email protected])