MARKET WATCH: Energy futures prices are mixed as OPEC hikes quota

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

HOUSTON, Apr. 25 -- Energy futures prices were mixed Thursday as ministers of the Organization of Petroleum Exporting Countries meeting in Vienna surprised the market by raising their collective production quota by 900,000 b/d to 25.4 million b/d on June 1, effectively promising to reduce recent overproduction by 2 million b/d.

"The bulk of the 'cuts' needed to balance supply (under OPEC's new quota) and demand in the very short run was provided in late March by OPEC's new shadow member—the coalition forces who 'liberated' Iraq," said Adam Sieminski, industry analyst at Deutsche Bank AG, Germany.

OPEC's decision Thursday was similar to its move last December in simultaneously raising official quotas while reducing actual production. But this time, "OPEC's surprise quota increase unnecessarily confused the market at a time when there is sufficient uncertainty already present, with debate over the return of Iraqi (oil production and export) volumes and concerns over economic recovery and the impact of the SARS (severe acute respiratory syndrome) virus on petroleum demand," said Matthew Warburton, UBS Warburg LLC, New York, in a Friday analysis.

OPEC mistake? Since world oil inventories are now near record lows, OPEC's "mistake" is not as bad as the one it "made in Jakarta in late 1997 when it endorsed overproduction ahead of the Asian (financial) crisis," Warburton said. However, he said, "By its actions, OPEC has partially undermined (its) substantial recovery in credibility achieved over the last 3 years."

Warburton had anticipated "an unofficial OPEC-10 (minus Iraq) production reduction of 1.5 million b/d over the next 2-3 months from current OPEC-10 production levels of 26.2 million b/d and a reaffirmation of the existing 24.5 million b/d quota. This would have had the double benefit of increasing global inventories at a rate marginally above seasonal norms, as well as preparing OPEC for the reintroduction of Iraqi volumes into world markets later this year."

The second half of this year "may well be dominated by demand uncertainties and an interplay of Iraqi (oil production) growth and Saudi (Arabia's) restraint," said Sieminski. He estimates that OPEC production in May and June will average 25.5 million b/d—26 million b/d, including Venezuela's heavy oil—"as the Saudis gradually lower their own output to accommodate whatever exports are managed from Iraq."

Venezuela and Iraq On Thursday, OPEC raised Venezuela's production quota to 2.92 million b/d from 2.82 million b/d previously. Although Venezuelan officials claim the country's oil production has recovered to nearly 3 million b/d following a crippling 63-day general strike, many outside observers doubt if Venezuela's production or exports have rebounded to pre-strike levels.

No production quota was set for Iraq. "Our contacts in Washington suggest that Iraq is unlikely to begin exporting again until the (United Nations administered) oil-for-food program is renewed sometime after its June 3 expiry. The strategy of the US administration appears to be to use the next few weeks to inspect oil facilities, make repairs, get Iraq's refineries working again, and begin establishing a temporary governance structure in the country," Sieminski said.

"Waiting until after June 3 to push for exports is seen as strengthening the US-UK position in the Security Council debate at the UN regarding the administration of Iraq's oil," he said. "OPEC ministers set another meeting for June 11 in Doha, Qatar. In our view, this date ties in nicely with the early June battle shaping up at the UN on Iraqi oil."

Moreover, Sieminski said, "By allowing a quota boost now, the ministers are giving themselves a higher base from which to make cuts (to accommodate Iraqi exports). A 'soft landing' for oil prices looks plausible in our view."

Meanwhile, Chevron Nigeria Ltd., a subsidiary of ChevronTexaco Corp., said that, since Apr. 4, it has gradually increased production in the Escravos area of Nigeria to a plateau of 310,000 b/d and has lifted the force majeure declared a month ago as a result of civil unrest in that area. The company set no timeframe for a return to full production, however.

Futures prices The June contract for benchmark US light, sweet crudes dipped by 1¢ to $26.64/bbl Thursday on the New York Mercantile Exchange, while the July position advanced by 2¢ to $26.35/bbl. Unleaded gasoline for May delivery jumped by 3.12¢ to 87.93¢/gal. Heating oil for the same month was up 2.23¢ to 77.3¢/gal.

The May natural gas contract dropped 9.5¢ to $5.47/Mcf on NYMEX as the US Energy Information Administration reported Thursday the injection of 61 bcf of gas into US underground storage during the week ended Apr. 18. That compares with the withdrawal of 48 bcf of gas the previous week and the injection of 69 bcf during the same period last year. US gas storage now stands at 684 bcf, down 891 bcf from a year ago and 573 bcf less than the 5-year average.

Meanwhile, outages at two US nuclear facilities have resulted in incremental demand for 400 MMcfd of gas since October 2002. Reports of a minor leak at a third unit in South Texas could add another 300 MMcfd of incremental gas demand until that plant is brought back on line in late summer, said Robert S. Morris on Thursday at Banc of America Securities, New York.

Projections for 40 of the largest US gas producers indicate that US gas production dropped by 1.8% during the first quarter of this year, compared with the same period in 2002, said Morris. However, he said, "Companies tend to be optimistic regarding their production outlook, and since we started tracking the largest public producers in early 2000, actual reported results have come in about 0.5%, on average, below initial projections."

Moreover, he said, "Excluding the impact of storm-related shut ins in the Gulf (of Mexico) and price-related voluntary curtailments (of gas production) in the first quarter last year, our models indicate that US natural gas production (during the latest quarter) would have declined nearly 5% (since the first quarter of 2002) and around 1.5% (from the fourth quarter)."

IPE, OPEC prices In London, the June contract for North Sea Brent oil gained 7¢ to $24.33/bbl Thursday on the International Petroleum Exchange. The May natural gas contract lost 1.1¢ to $2.61/Mcf on IPE.

The average price for OPEC's basket of benchmark crudes plunged by $1.17 to $23.97/bbl Thursday.

Contact Sam Fletcher at samf@ogjonline.com