Oil futures close higher as output risks remain
Prices remain under $64 as some analysts expect further weakness for crude
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Last Update: 3:34 PM ET Sep 18, 2006
SAN FRANCISCO (MarketWatch) -- Crude futures closed higher Monday as ongoing risks to global production and a startup delay of a key oil platform in the Gulf of Mexico prompted the market to recover part of last week's loss, but prices remained under $64 a barrel on expectations for lower oil demand and strong production.
The market's likely in an oversold position, said Emanuel Balarie, a senior market strategist at Wisdom Financial.
"Longer term, as long as China and other emerging nations continue their growth and long-term supply remains tight, the outlook for $100 oil is still intact," he said.
And if oil prices fall much lower, the Organization of the Petroleum Exporting Countries might consider cutting production and stabilizing prices," he said.
But John Kilduff, an analyst at Fimat USA, said he believes that "the only thing preventing the crude-oil market from falling even further is its oversold technical condition."
The path of least resistance remains lower, he said, with pressure from several factors including: OPEC lowering its demand forecast again, expectations that non-OPEC oil output will be highest since 1984 and an El Nino weather forecast pointing to the potential for a warmer-than-normal winter.
Crude for October delivery climbed 47 cents to close at $63.80 a barrel on the New York Mercantile Exchange. It rose as high as $64.45 during the session, reversing course after an earlier low of $62.85.
On Friday, the contract posted a modest gain to recover from a low of $62.05 -- its weakest level of the year, but still registered a loss of nearly $3 last week on speculation that oil demand is weakening. See full story.
Also in the Nymex session, October unleaded gas closed up 0.46 cent at $1.5796 a gallon and October heating oil added 2.34 cents, or 1.4%, to close at $1.7257 a gallon.
BP encounters platform startup delay
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BP65.55, +0.69, +1.1%) announced Monday afternoon that repair of sub-sea production equipment will delay the start up of production from its Thunder Horse platform in the Gulf of Mexico until at least the middle of 2008.
The company had expected production to begin by the end of 2005, then "first oil" at the platform was rescheduled for 2007 because of repairs needed following Hurricane Dennis in July 2005, according to BP.
Thunder Horse was one of the key discoveries upon which BP said it will grow its future Gulf production. The platform is designed to process 250,000 barrels of oil per day and 200 million cubic feet of natural gas per day.
When completed, Thunder Horse will be the largest producer in the Gulf, BP said on its Web site.
The news of the delay and other concerns, including the recent decline in crude's price premium and tension following last week's remarks on Islam by Pope Benedict XVI helped strengthen crude's price Monday, said Kevin Kerr, editor of Global Resources Trader, a newsletter of MarketWatch, the publisher of this report.
Hodgepodge
Also adding to oil's strength Monday, "there has been talk that Saudi Arabia will begin unofficially cutting back production, as crude-oil prices approach $60 a barrel, representing the first psychological threat to sellers in almost three weeks," said Kilduff.
Saudi Arabia's oil minister recently said the country would produce between 9.1 million and 9.2 million barrels per day in September -- that would be down from nearly 9.5 million barrels per day in the first quarter, according to Kilduff.
At the same time, "the market's slide has deepened as concerns wane over the possibility of Iran withholding oil shipments in its dispute with the West over its nuclear ambitions," he said.
This "should not usher in a period of complacency on the part of market participants," he said.
Iran warned Monday that it will stop cooperating with United Nations' nuclear inspectors if the U.N. Security Council acted against it, but also said negotiations could still work, AFP reported.
And in other news, Iran's President Mahmoud Ahmadinejad met with Venezuelan President Hugo Chavez ahead of a trip to New York for this week's U.N. General Assembly. Ahmadinejad said the U.S. represents "the tyrants of the world today," and referred to Chavez as his brother, the Associated Press reported Monday.
For now, it is possible that the $62.50-$64.50 level in crude oil is a temporary bottom, said Kilduff. "In order to make that level a solid low will require a somewhat improved outlook for the global economy in coming weeks."
In contrast, Charles Perry, chairman of Perry Management, an energy-consulting firm, expects oil prices to fall into "the high $50s at the bottom."
"When supply exceeds demand, the price will go down," he said, and that is "where we are today."
While OPEC members have indicated they will attempt to hold the price above $60 a barrel, Perry said he's "skeptical that OPEC can have any great effect on crude prices," given that the cartel's output is now less than 30% of world production and some members have let their production decline in the past few years.
Even so, certain OPEC members can "scare the price up with their saber rattling and threats," Perry said. Consumption of gasoline may pick up on the heels of the lower retail prices, and that could put the brakes on the crude-price decline as well, he said.
"Be prepared for the next rise in crude-oil prices in late 2006 or early 2007, and make no mistake about it -- long term, crude-oil prices will rise," he said.
'Technical' outlook
Citigroup analyst Doug Leggate expects oil prices to continue to trade lower in the near future.
Leggate said he believes that "technicals" have become a "key lead-indicator" of oil prices, because of the dominance of investment funds in trading oil futures, which currently make up about half of the market, and since funds are driven more by technical factors than market fundamentals.
"Currently, out technical analysts predict substantial near-term oil price risk, with a move as low as $50 likely over the next few months," he said.
In contrast, Morgan Stanley technical analyst Mark Newton said he thinks conditions are right for crude-oil prices to enjoy a bounce that could take prices back above $70 a barrel.
"The recent drop in crude oil ... to oversold territory over the last few months has reached a strong area of support that creates an attractive near-term buying opportunity," Newton said. "Factors such as momentum, sentiment and intermediate-term cycles all suggest that this pullback is buyable from a risk-vs.-reward perspective."
He said a rebound could reach initial resistance at the $68 to $70 a barrel level, while intermediate-term resistance sits in the mid-$70s.
Natural gas falls back
In other energy markets, natural-gas futures retreated from an earlier high to end the session lower.
The October contract closed 4 cents, or 0.8%, lower at $4.942 per million British thermal units after peaking at $5.14 for the day.
The contract had edged up 9 cents on Friday, following two-and-a-half-year intraday low on Thursday.
Overall, however, natural-gas prices have "already come down quite dramatically," said Ben Smith, a managing partner at First Enercast Financial.
"The winter contracts are still priced relatively high," he said, and the most expensive monthly contracts (January, February and March) appear to be selling off the most today.
"Given the current storage situation, we should have no concerns meeting natural gas demand this winter, even if it is colder than normal," he said. "This makes these winter contracts the most susceptible to further downside risk."
In equities, benchmarks tracking stocks in the oil and gas sectors climbed, with the Oil Service Index ($OSX : phlx euro style oil svc index osx
