MARKET WATCH--Energy futures prices increase in anticipation of OPEC production cut
<a href=ogj.pennnet.com>Oil & Gas Journal Sam Fletcher Senior Writer
HOUSTON, Apr. 22 -- Energy futures prices continued to climb Monday on the New York Mercantile Exchange in anticipation that ministers of the Organization of Petroleum Exporting Countries will agree to cut production—or at least trim overproduction back to official quota levels—at their meeting Thursday in Vienna.
"The organization's production last month, excluding Iraq, was around 2.5 million b/d above its 24.5 million b/d quota. The only debate appears to be whether members will decide to maintain the current quota and just agree to reduce output or if they will decide to set a new lower quota," Robert S. Morris reported Monday. Morris is an industry analyst with Banc of America Securities, New York.
"Overall, we expect an informal output reduction of between 1.5-2 million b/d to be implemented consistent with a simple reaffirmation of the current 24.5 million b/d quota and the $22-28/bbl OPEC price band," said Matthew Warburton, UBS Warburg LLC, New York, in a separate report Monday.
Iran and Indonesia have called for production cuts at the upcoming meeting. Although not a member of OPEC, Russia indicated it would cooperate in reducing oil supplies (OGJ Online, Apr. 21, 2003).
OPEC's basket of seven benchmark crudes gained 39¢ to $26.64/bbl Monday.
Iraqi, Venezuelan factors However, doubt "over the timing and extent of the return of Iraqi production is likely to complicate discussions at the meeting, as are recent requests by Venezuela to be temporarily exempt from quotas to recoup lost revenue during (its 63-day) general strike," Warburton said. "Given previous over-optimistic statements (by government officials) over the pace and extent of the recovery in Venezuelan production, we believe it is unlikely that OPEC ministers will afford Venezuela any special status with regard to quotas."
Paul Horsnell, head of energy research for JP Morgan Chase & Co., London, sees no need for OPEC to cut production yet, with demand for OPEC crude projected at 23.1-25.3 million b/d during the second quarter (OGJ Online, Apr. 17, 2003).
"There are certainly no signs of any surplus in the US weekly data, with the deficit in total inventories from the 5-year average widening (during the week ended Apr. 11) for the14th time in the last 15 weeks," Horsnell said. "(US) gasoline inventories need to start building dramatically over the next 2 months to avoid major dislocations. With inventories not building, even with record import levels, and with retail prices still falling and hence pricing back demand, the situation appears to hold dangers. . ."
Moreover, he said, "The usual seasonal build (in US heating oil inventories) should begin soon, but it is starting from a very low base. It does not seem premature to say that only a mild winter is likely to stop the US oil system lurching from gasoline spikes to heating oil spikes as it did in cycles in 2000-2001."
NYMEX prices The May contract for benchmark US sweet, light crudes gained 32¢ to $30.87/bbl Monday on NYMEX, while the June position increased by 29¢ to $28.83/bbl. Heating oil for May delivery jumped by 2.72¢ to 80.08¢/gal. Unleaded gasoline for the same month gained 0.32¢ to 90.98¢/gal.
The May natural gas contract inched up 0.4¢ to $5.71/Mcf on Monday "as a slightly softer physical market was offset by some short-covering (buying commodities to close out a short sale) ahead of cooler late-week forecasts," analysts said Tuesday at Enerfax Daily.
"While temperatures have moderated from the much-below normal levels seen early in the month, traders said readings were still cool enough to generate some overnight load and slow the overall pace of building storage levels. Longer term concerns about sagging natural gas production and record low storage are likely to keep the overall picture bullish, at least until some sizeable storage builds are seen," Enerfax analysts reported.
The US Energy Information Administration last week reported the withdrawal of 48 bcf of gas, much more than most analysts expected, from underground storage during the week ended Apr. 11 (OGJ Online, Apr. 21, 2003).
James L. Williams, president of WTRG Economics and publisher of Energy Economist Newsletter, noted that was the second draw down from gas storage in as many weeks. "While this is not normal for April, it does happen every 3-4 years," he said.
Williams also noted, "Natural gas was priced above crude for most of the reporting week. Normally on a btu (basis), natural gas prices are capped by crude oil prices. The normal historical exceptions to this occur during peak winter demand and a few rare occasions when crude prices were below $12/bbl."
He said, "US (gas) storage is currently 604 bcf below normal. To refill normal winter storage levels by the winter heating season, the US will need to have near-record gas well completions, and the problem will be timing. Since almost 30% of natural gas production capacity will be from wells drilled this year, drilling must respond faster than it did 2 years ago"
The International Petroleum Exchange in London was closed Monday for a holiday.
Contact Sam Fletcher at samf@ogjonline.com