FUTURES MOVERS: Brent futures hovers around $25 level
cbs.marketwatch.com By Myra P. Saefong, CBS.MarketWatch.com Last Update: 7:11 AM ET March 21, 2003
NEW YORK (CBS.MW) -- Brent crude futures sagged again in London trading Friday, as traders looked beyond fresh reports of oil wells set afire in southern Iraq and concentrated instead on the course of the military campaign against Saddam Hussein.
Brent for May delivery dropped back below the $25 level before recovering somewhat, trading lately at $25.20 a barrel, off 30 cents, on London's International Petroleum Exchange. Brent crude closed down $1.25 a barrel on Thursday.
Meanwhile, spot gold gave up early gains, skidding 10 cents to $332.30 an ounce. On Thursday, gold futures closed at a three-month low. See Metals Stocks.
Brent's price weakness points to a further retreat in the benchmark crude contract when trading opens later on the New York Mercantile Exchange.
Expectations that the U.S. and allied war against Iraq will be quick with little disruption eventually won the favor of most oil traders on Thursday, prompting crude futures to fall for a sixth-straight session back to mid-December levels.
"The feeling is apparently very widespread that the conflict will be resolved quickly and oil will flow freely into the marketplace," Michael Fitzpatrick, an analyst at Fimat USA, told clients Thursday.
During the session, developments in the war took crude prices on a roller coaster ride, with nearly $3 separating the price from its low and its peak.
As many as four oil fires are burning in southern Iraq, U.S. defense officials said Wednesday.
During a press conference, White House spokesman Ari Fleischer said allied forced were confirming the fires at a "small number" of wells, but had no information as to the extent of the damage. See Special Report: America at War.
The news provided oil with a temporary lift, but that soon faded when the number of oil fires was actually smaller than many had anticipated.
"This is really a good sign," said energy analyst Peter Zeihan of Stratfor, an intelligence-consulting group based in Austin, Texas, explaining that the oil market was expecting many more wells to be set on fire, even at the start. Listen to Zeihan's outlook.
He now believes that the wells mentioned in the news are part of the Rumaila oil fields, Iraq's second-largest producing field geographically behind Kirkuk in the north. Rumaila accounts for about half of Iraq's production of around 2.4 million to 2.5 million barrels per day.
There were reports that several hundred of the more than 500 wells in Rumaila were wired together with explosives by the Iraqis and that there was a single switch that would trigger a fire in all of them, he explained.
The news that only a few wells were set on fire indicates that there is no single switch, he said.
In Thursday's Nymex action, April crude closed at $28.61 a barrel, down $1.27, to sit at its lowest close since Dec. 13, 2002. The contract, on the decline since March 13, has lost $9.22 in the last six sessions -- nearly a 25 percent pullback.
Crude for May delivery, which became the front-month contract at the close of the session, fell by $1.24 to $28.12 a barrel.
"The removal of uncertainty has led to a reduction in the [oil] risk premium by as much as one half" -- but not a single shot needed to be fired for this to happen, said Thorsten Fischer, an oil economist at Economy.com.
"It was enough that the market was convinced that the waiting was going to be over soon," he said. "That is why the actual start of the campaign did not make that big of a difference."
Oil prices have dropped dramatically since the U.S. made its decision to forcibly disarm Iraq, with investors expecting the war "to go well for the U.S., Iraqi oil fields to be preserved and a safer, friendlier oil trade to emerge as a result," said Todd Hultman, president of Dailyfutures.com.
Most oil traders are "acting as if the outcome of the war is in the bag, but clearly it is not -- at least not yet," he said.
What next
Right now, the biggest concern for oil traders will be the condition of the oil fields in Iraq and Kuwait and the flow of oil tankers in the Persian Gulf," said Hultman.
Economy.com's Fischer emphasized that "everything depends on how the campaign proceeds."
Crude prices will continue to fall as long as the war goes according to plan -- "as long as there is no bad news" which could come in the form of an escalation of the conflict either because Saddam attacks Israel or uses biological and chemical weapons, he said.
The war situation would also worsen if Saddam succeeded in destroying oil fields in neighboring countries, Fischer said. "Any of these developments would cause crude prices to reverse course, but most likely only temporarily," he said.
If things went terribly wrong and prices shot up again, the Bush administration would release crude from the Strategic Petroleum Reserve, "dampening further price hikes," he said.
Michael Lynch, president of Strategic Energy & Economic Research (SEER) in Winchester, Mass., pointed out that a release from the Strategic Petroleum Reserve can be "considered 'in the pipeline' right away" because the markets know the details of the amounts, location and delivery of the oil.
Supplies reassured
For now, oil traders need "deep pockets to survive, because there are going to be sharp swings up and down in the next week or two," said SEER's Lynch. "Any given position could be hammered," he said, so "expect margin calls."
There's no sure way of making money, but traders "may try to benefit from the increased volatility, while more conservative people may just want to hedge the price of energy they'll have to pay for their business," Fischer said.
With concerns over supplies growing, OPEC and the International Energy Agency reassured the oil market that producers are committed to maintain oil supplies in the event of war-related disruptions.
In a statement from Paris, Claude Mandil, the IEA's executive director, said: "With the initiation of military operations in Iraq we are monitoring developments as they relate to the supply of oil to world markets ... We are determined to promote stability in world oil markets and remain ready to reinforce producers' efforts should the need arise."
OPEC said on Thursday it would make up for any oil shortages from the attack on Iraq, using spare output capacity to ensure continued supply, Reuters reported.
OPEC President Abdullah al-Attiyah of Qatar said he had spoken with all 11 members of the oil cartel following the attack.
Against this backdrop, the Energy Department and American Petroleum Institute both reported Wednesday a rise in crude inventories and a drop in gasoline supplies, but data for distillates were mixed.
Crude inventories, as of the week ended March 14, stand nearly 18 percent below the year-ago level, and distillate and gasoline stocks are 23.5 percent or 7 percent below their year-ago levels, respectively, according to the two reports. See the full story.
Retail gasoline prices slip
Prices for gas at the pump were slightly lower for a second-straight day on average for the nation Thursday, according to AAA's Daily Fuel Gauge Report.
The average price at the pump totaled $1.714 a gallon as of early Thursday, compared with $1.719 on Wednesday. A year ago, prices stood at $1.298 a gallon. The price touched a fresh all-time high Tuesday at $1.722.
Retail prices in California were the highest in the nation, averaging $2.176 a gallon, unchanged from the day before, the AAA's report said.
"Gasoline prices may well reach new record highs if stronger demand coincides with still high prices," said Economy.com's Fischer. They will certainly reach record highs if one of the more pessimistic scenarios plays out in the Gulf and crude prices rise again," he said.
Futures prices appeared to be unfazed by an unconfirmed report that terrorists are mulling an attack on key U.S. refineries in the Caribbean.
The Oil Price Information Service, a provider of gasoline commentary, said the U.S. believes terrorists could be planning an attack on a 495,000 barrel-per-day refinery in the Virgin Islands operated by Amerada Hess (AHC: news, chart, profile) and a 250,000 barrel-per-day facility in Aruba run by El Paso (EP: news, chart, profile).
The report is an exclusive to OPIS and its newsletter Oil Express. A call to Amerada Hess seeking comment wasn't returned. An El Paso spokesperson said "all of our facilities are operating at a high state of alert. We employ a multitude of security measures and [are] continually updating and enhancing them and do not discuss specific security measures."
In the futures market, April gasoline prices closed at 90.96 cents a gallon, down 3.29 cents on the session.
Also on Nymex, April heating oil fell by 1.17 cents to 82.44 cents a gallon.
"Refined products will follow crude prices, but strong seasonal demand for gasoline will support gasoline, whereas demand for distillates will continue to fall," said Fischer.
Natural gas climbs
April natural gas climbed by 2.8 cents to close at $5.306 per million British thermal units after a weekly update on U.S. supplies revealed a decline within market expectations.
The Energy Department said natural-gas inventories fell by 85 billion cubic feet during the week ended March 14.
Total inventories of 636 billion cubic feet are now 1 trillion cubic feet less than the level of a year ago and 646 billion cubic feet below the five-year average.
Total stocks are at "a new all-time spring low," said IFR Pegasus senior analyst Tim Evans. But "mixed weather and fickle petroleum may continue to hamper uptrend development."
Fimat expected U.S. gas in storage to have been drawn down by 88 billion cubic feet last week.
In the equities arena on Thursday, the Philadelphia Oil Service Index ($OSX: news, chart, profile) traded higher. See Energy Stocks.
And the Reuters/CRB Index -- a broad-based measure of the commodity futures market -- closed at 234.2, down 0.4 percent amid weakness in gold and energy futures markets.
Myra P. Saefong is a reporter for CBS.MarketWatch.com in San Francisco.