Futures traders test $40 oil

www.oaoa.com By Julie Breaux Odessa American

Futures contracts on West Texas Intermediate crude oil traded wildly Thursday amid fears of an imminent U.S. invasion of Iraq and concerns over tight crude oil inventories. At the New York Mercantile Exchange, front-month April crude oil futures climbed as much as $2 to $39.99 a barrel, the highest level since October 1990, when prices set a record high of $41.15 after Iraq’s invasion of Kuwait. The contract settled at $37.20 a barrel, down 50 cents. On London’s International Petroleum Exchange, the volatility was less extreme. April Brent ended down three cents at $33.04 a barrel. Morris Burns, executive vice president of the Permian Basin Petroleum Association, said Thursday’s trading was reminiscent of the Gulf War. “This happened before the first Persian Gulf War in late 1991, early ’92. We had a price runup and it got around $40, but as soon as the first shots were fired, it got back down to around $25,” Burns said. Thursday’s early gains came amid concerns over tight U.S. crude inventories — now at their lowest level since 1975 thanks to cold weather and a strike in Venezuela — and growing jitters over a possible U.S.-led attack on Iraq, traders said. But, the U.S. government lowered its terror threat level from high to elevated — Orange to Yellow — citing the end of the Muslim hajj pilgrimage as a key factor, a move that pared oil’s gains, traders said. Nonetheless, Odessa mineral and royalty investor Kirk Edwards called Thursday’s surge in both crude oil and natural gas prices “absolutely bizarre.” Concerns over dwindling natural gas supplies lifted natural gas prices more than $2 on Monday to close at $9.14 per 1,000 cubic feet. On Thursday, natural gas for March delivery rose 9.5 cents to settle at $7.49/mcf. Edwards said the most recent drawdown of stored natural gas was the largest ever, “putting it on a record pace to be the lowest mark in storage history when the winter ends.” In Texas, sub-freezing temperatures Monday and Tuesday sent demand for natural gas and electricity soaring, said Bill Loos, general manager of Odessa-Ector Power Plant, the 1,000-megawatt natural-gas fired plant that generates power for Texas intrastate power grid. “We were very fortunate. We were not curtailed during the cold spell,” Loos said. In fact, the Odessa plant’s demand load increased as some natural gas providers curtailed supplies to power companies in East Texas in order to meet their own customers’ heating demands, Loos said. The supply imbalance sent the spot price electric companies pay for natural gas into orbit, Loos said. On Monday, the spot price of natural gas for 1 million British thermal units was $13.89. On Tuesday, the price almost doubled to $25.10/mmBtu, falling to $15/mmBtu on Wednesday. And electrical prices followed suit, Loos said. Electrical prices that usually run $40 per 1 megawatt-hour skyrocketed anywhere from $200 to $1,000 per megawatt-hour. The surge in energy prices, however, is having little effect on new drilling activity in the Permian Basin, Edwards said. But that doesn’t mean producers aren’t profiting from current production. “I would say probably across the board every oil-related company is making more money than they have because they’re not spending it on drilling right now,” Edwards said. “Even though prices are great, people are still on the sidelines, which means they’re flush with cash, not flush with drilling prospects.” Edwards said the lack of new drilling indicates to him that producers aren’t convinced the current price is anything but an anomaly. Still, those public school districts in the Permian Basin that depend on oil and gas production for tax revenue will be “very pleased” when they prepare their 2003-04 budgets this fall, Edwards said. “Ad valorem taxes that the oil companies will pay will be substantially higher next year due to the very high prices the year started out with,” Edwards said. Of the nearly $68 million in ad valorem taxes ECISD expects to collect in fiscal 2002-03, about $20 million will come from minerals, said Tonya Tillman, ECISD director of finance. The Associated Press contributed to this report.