Market watch: Markets whittle war premium ahead of US attack on Baghdad

ogj.pennnet.com Sam Fletcher Senior Writer

HOUSTON, Mar. 20 -- Energy futures prices continued to tumble Wednesday just hours before US-led forces attacked a "target of opportunity" among "Iraqi leadership" in Baghdad with the opening shot of a long-anticipated war.

Oil futures prices have fallen by a cumulative $7.95/bbl during the last five consecutive trading sessions on the New York Mercantile Exchange as traders stripped away the so-called "war premium" that in recent months had pushed prices an estimated $5-8/bbl above the normal market dictates of supply and demand.

Markets often "buy the rumor and sell the fact," with the occurrence of an anticipated event triggering a price drop. But traders may have moved "far too far, far too fast, and on the basis of far too little hard information" in assuming the war will be a short conflict with virtually no disruption to world oil supplies (OGJ Online, Mar. 19, 2003).

In a televised address to the nation Wednesday night, President George W. Bush cautioned that the war might be "longer and more difficult than some predict."

Burning wells US military officials reported Thursday a "small amount of wells" on fire in the southern region of Iraq. Various sources in recent weeks reported increased evidence that Saddam Hussein's forces were wiring Iraqi oil wells with explosives.

Meanwhile, evacuation of United Nations personnel prior to the attack on Baghdad apparently ended Iraqi oil exports of 1.7 million b/d under the oil-for-aid program instituted in 1991 after Desert Storm. Military action will likely knock out the additional 300,000 b/d of oil that Iraq supplies to Jordan and Syria.

However, Tyler Dann, an analyst in Banc of America Securities' Houston office, said Wednesday that US-led forces were pushing back Iraqi positions on the borders of Kuwait and Turkey "for at least a week" prior to the Baghdad attack.

Quoting "a trusted source," Dann said, "Coalition troops are experiencing more success in securing the fields in the southern no-fly zone, representing around 60% of Iraqi production." Securing fields in the north "will likely take more time," Dann said, due to Turkey's refusal to allow the US to station attack troops there.

Shortly after the attack on Baghdad, air raid warnings were sounded in Kuwait City where buildings were evacuated, and citizens were warned to don gas masks as Scud missiles from Iraq struck that city. The head of Kuwait Oil Co. previously said all of Kuwait's northern oil fields would be shut down to protect workers in case of war in Iraq. In February, Al Abdali and Al Ratqa fields were shut in because of their proximity to the Iraqi border.

Thursday, top officials from the Organization of Petroleum Exporting Countries reiterated pledges to make up any loss of oil production as a result of the war. However, analysts claimed OPEC doesn't have enough capacity to compensate for the loss of both Iraq and Kuwait production.

Other problems Former officials of Petroleos de Venezuela SA said the retirees and foreign workers brought in to replace some of the 15,000 strikers fired by the government failed to restart a catalytic cracker at the 130,000 b/d El Palito refinery in Venezuela. Government officials had said that work would be completed last week. Dissidents also reported PDVSA is now producing 2.4 million b/d of oil, while the government claims production exceeds 3 million b/d.

"The operating risk (in Venezuela) for foreign oil companies remains high, with or without President Hugo Chávez," analysts in Deutsche Bank AG's London office said earlier this week. "The ongoing governance crisis, the threat to Venezuela's already frail institutions, high political tension, cashflow pressure across corporate and government sectors, gasoline and food shortages, as well as lost oil production have placed immense strain on the domestic economy."

In the interim, Dann reported Royal Dutch/Shell Group shut in 76,000 b/d of production in Nigeria and was evacuating personnel as violence escalated prior to upcoming elections in that country. He said ChevronTexaco Corp. had not reported disruptions at its neighboring facilities, however.

Energy prices The April contract for benchmark US sweet, light crudes fell $1.79 to $29.88/bbl Wednesday on NYMEX, while the May position lost 69¢ to $29.36/bbl. Heating oil for April delivery plunged by 2.17¢ to 83.61¢/gal. Unleaded gasoline for the same month was down 1.94¢ to 94.25¢/gal.

The American Petroleum Institute reported Wednesday a 5.1 million bbl increase in US crude supplies to 272.2 million bbl during the week ended Mar. 14. The US Department of Energy, however, charted a rise of 400,000 bbl to 270.2 million bbl for the same period.

API marked an increase of 1.3 million bbl in US distillates to 101.5 million bbl, while DOE reported a loss of 1.1 million bbl to 97.2 million bbl. Both recorded a drop in US gasoline stocks; down 1.7 million bbl to 201 million bbl, according to API, while DOE reported a decline of 900,000 bbl to 201.1 million bbl.

"Even with the material divergence between DOE and API weekly crude and distillate inventory changes, crude inventories remain tight and product inventories continue to tighten," analysts said Wednesday at UBS Warburg LLC, New York.

Record low gas storage The April natural gas contract dipped by 6.1¢ to $5.28/Mcf Wednesday on NYMEX, following the crude oil market lower "despite a firmer physical market and concerns about low inventories," analysts at Enerfax Daily reported Thursday.

The US Energy Information Administration said Thursday that 84 bcf of natural gas was withdrawn from US underground storage last week, compared with withdrawals of 117 bcf the previous week and 92 bcf during the same period last year.

US gas storage now stands at a record low of 636 bcf, down 1 tcf from a year ago and 1.28 tcf below the 5-year average.

In London, the May contract for North Sea Brent oil lost 50¢ to $26.75/bbl Wednesday on the International Petroleum Exchange. The April natural gas contract inched up 0.3¢ to the equivalent of $2.784/Mcf on IPE.

The average price for OPEC's basket of seven benchmark crudes lost 57¢ to $27.12/bbl Wednesday.

Contact Sam Fletcher at samf@ogjonline.com