Market watch: Oil futures prices fell Friday, but may rebound on war developments

<a href=ogj.pennnet.com>Oil & Gas Journal Sam Fletcher Senior Writer

HOUSTON, Mar. 24 -- Energy futures prices continued to plummet Friday, with confident traders selling off long positions on reports that US-led forces had secured oil fields in Iraq. But oil prices rebounded early Monday in the London market, with news that Iraqi troops mounted a strong resistance to Allied troops over the weekend.

A press conference planned Monday in one captured Iraqi oil field was canceled by the US military because of danger from Iraqi forces.

"Not nearly safe" Reuters news service reported Monday that fighting had driven out civilian well control specialists who had been brought in to extinguish well fires in Iraq's Rumaila field. Reuters quoted Brian Krause, vice-president and senior well control specialist for Houston-based Boots & Coots International Well Control Inc. as saying: "It's not nearly as safe as they said it was. We're kind of sitting ducks out there."

British military sources earlier reported almost all Iraqi oil facilities were mined or booby-trapped.

In its daily internet update, the US Energy Information Administration reported, "The US military has stepped up security in the vicinity of the Rumaila oilfield on Monday after reports of armed Iraqis in the vicinity, but a US military spokesman stressed that 'they won't be able to destroy the wells.'"

EIA said all Iraqi oil exports have halted, "with the last ship having loaded oil from storage tanks at Turkey's port of Ceyhan last Thursday. With the departure of (United Nations) staff from Iraq, the UN oil-for-(aid) program is effectively on hold. Also, no oil is leaving Iraq's Persian Gulf port of Mina al-Bakr. Most of the oil production and pipeline infrastructure in the south is now under coalition control. A small number of oil well fires have been confirmed, but overall damage appears to have been minimal."

Market "too complacent" In a strongly worded report Monday, Paul Horsnell, head energy analyst for J.P. Morgan Securities Inc. in London, charged, "The oil market has become too complacent about the war, its risks, and the risks of the postwar situation."

He said, "Oil markets fell Friday on unconfirmed (and since then unrepeated) reports that US Special Forces have secured Kirkuk oil field (in northern Iraq). Given the sheer size of Kirkuk field, we do not find it credible that all the Kirkuk wells could possibly be secure."

More important, Horsnell said, "The world oil industry is currently running very short in terms of discretionary inventory cover. In the US in particular, crude oil inventories (are) running close to minimum operating levels." At the same time, he said, "The US is now entering a period in which crude oil runs rise seasonally."

Horsnell said, "In all, the system needs an oil surplus to, first, stop the current inventory falls, more surplus to meet the increase in refinery runs, and then even more surplus to provide some cushion away from the rocks of low inventory cover."

World markets are depending on the other 10 members of the Organization of Petroleum Exporting Countries—particularly Saudi Arabia—to make up any shortfalls in oil supplies resulting from the war in Iraq.

However, Horsnell noted, the recent drop in oil prices "has already taken prices to precisely where Saudi Arabia wants them, i.e., within the OPEC target band. Further, some traders seem to be seriously thinking that they could attempt to push prices below the bottom of the target band, i.e., precisely where Saudi Arabia does not want them."

Under those circumstances, Horsnell said, "We would not expect very many of the Saudi barrels in inventory to actually make it to market, and in addition we would expect the level of Saudi production to be scaled back significantly."

Nigerian crisis Meanwhile, the OPEC news agency reported Monday that Nigeria's oil industry "is facing its worst crisis in recent times as a result of an escalation of political violence in the Warri area and other parts of the Niger Delta region."

Chevron Nigeria Ltd., a subsidiary of ChevronTexaco Inc., said Sunday it was forced to shut in 440,000 b/d of its total Nigerian production of 450,000 b/d. The company last week declared force majeure after shutting in 140,000 b/d. The Royal Dutch/Shell Group and TotalFinaElf SA also have been forced to shut in production, jumping the total amount of disrupted Nigerian production to 600,000-800,000 b/d, EIA reported Monday.

Several sources reported Ijaw tribal fighters have taken over many of the production and infrastructure facilities in the Bayelsa state.

"In the words of one of their leaders, 'We'll blow up these flow stations and blast the pipelines. We will take Nigeria 20 years backward.'" Horsnell reported. "Nigeria seems to be doing a pretty good job at going many years backward already, but the Ijaw threat appears to be a serious one."

Chávez blasts Allied "aggression" In his weekly radio program Sunday, Venezuelan President Hugo Chávez said his country "joins the peoples of the world and the majority of governments of the world that reject the aggression against the people of Iraq." He urged UN Secretary Gen. Kofi Annan "to speak out and reject the aggression against the people of Iraq. That cannot be tolerated."

A founder and charter member of OPEC, Venezuela was one of the nearest and, before the recent general strike, largest suppliers of oil to the US market. Government officials claim the country has restored its oil production to more than 3 million b/d, but former Petroleos de Venezuela SA officials claim current production is actually 2.4 million b/d.

At any rate, Venezuelan Energy Minister Rafael Ramirez said over the weekend that his country and other OPEC members are not planning to increase oil production.

Ramirez denied "rumors" that OPEC had authorized members to increase production to maximum capacity to offset lost production from Iraq and other sources. "At the last conference of OPEC ministers, held in Vienna, it was agreed not to increase the production ceiling—that is to say that there would be no oil production increases, and maintain the limit of 24.5 million b/d, (excluding Iraq)," he said.

Market prices The May contract for North Sea Brent oil lost $1.15 to $24.35/bbl Friday on the International Petroleum Exchange in London, with prices falling near the close of trade on expectations of a short, successful war in Iraq. However, that contract was trading at $25.55/bbl early Monday on IPE, up $1.25 from Friday's close, on new evidence that the war may not be over as swiftly as anticipated. The April natural gas contract lost 2.2¢ to the equivalent of $2.73/Mcf Friday on IPE.

The new near-month May contract for benchmark US light, sweet crudes fell by $1.21 to $26.91/bbl Friday on the New York Mercantile Exchange. The June contract was down $1.09 to $26.18/bbl. Heating oil for April delivery plunged 6.88¢ to 75.56¢/gal. Unleaded gasoline for the same month dropped 5.74¢ to 85.25¢/gal.

The April natural gas contract lost 17.8¢ to $5.13/Mcf Friday on NYMEX. It was "undermined by a soft physical market and further weakness in crude oil futures despite long-term concerns about record low inventories," said analysts at Enerfax Daily.

The average price for OPEC's basket of seven benchmark crudes fell by $1.70 to $24.81/bbl Friday.

For the entire week, however, the OPEC basket price averaged $28.42/bbl, down $4.30/bbl from the previous week's average.

So far this year, the OPEC basket price has averaged $30.99/bbl, up from $24.36/bbl for all of 2002.

Contact Sam Fletcher at samf@ogjonline.com