Energy prices swing with changing influences

Sam Fletcher
Senior Writer

Energy futures prices fluctuated strongly Mar. 22-24 in reaction to a succession of different influences that caused markets first to fall and then to rebound.

Prices plunged Mar. 22 with the May contract for benchmark US light, sweet crudes falling by $1.43 to $56.03/bbl on the New York Mercantile Exchange, the biggest single-day loss in more than a month, as traders took profits from the recent run to record levels. Commodity prices plummeted more Mar. 23 as speculators, particularly institutional investors, pulled out of that market following a resurgence in the value of the US dollar against other major currencies. The May contract fell further to $53.81/bbl, the biggest loss in 3 months.

Paul Horsnell, Barclays Capital Inc., London, said the same day that speculative unhedged money flows had swung heavily to the long side of the market where investors are obligated to take delivery when contracts expire. "In all, the rapid build-up in those positions leads us to expect that a move down could gain some momentum once set in progress," Horsnell said.

The sell-off by speculators was encouraged by a report by the US Energy Information Administration that commercial US crude inventories shot up by an unexpected 4.1 million bbl to 309.3 million bbl in the week ended Mar. 18, the fourth consecutive week of gains above 2 million bbl. However, US gasoline stocks plunged by 4.1 million bbl to 217.3 million bbl in that same period. Distillate fuel stocks fell by 2.8 million bbl to 104.5 million bbl. US imports of crude increased by 229,000 b/d to nearly 10.3 million b/d during the same week. Input of crude into US refineries decreased by 150,000 b/d to 15 million b/d, with refineries operating at 90.2% of capacity.

That indicated US demand remains strong, led by distillates, said Horsnell. "The key Mid-Atlantic States are now running pretty empty, below 10 million bbl of heating oil," he said. "The only real weakness in the latest data lies on the crude oil side, where inventories have just started to climb faster than normal from the already higher than normal base. This is an almost inevitable result of there having been a consistent 60-70¢ contango [with futures market prices in succeeding delivery months progressively higher than in the nearest delivery month]," Horsnell said. "Until that contango is shocked away, there will be continuing pressure to build relative to normal because of cash-and-carry arbitrage."

Prices rebound
However, energy prices rebounded Mar. 24, following an explosion and fire on Mar. 23 that damaged an isomerization unit at BP PLC's refinery at Texas City, Tex., killing 15 people and injuring more than 100. That unit had been shut down for maintenance turnaround and was in the process of being brought back online at the time of the accident. The refinery remained in operation despite damage to the unit.

Nonetheless, NYMEX gasoline for April delivery hit an intraday high of $1.608/gal in electronic trading before settling at $1.5992/gal, up by 2.43¢ on Mar. 24 after losing a total 3.37¢/gal in the previous two sessions. The May crude contract also regained $1.03 to $54.84/bbl as traders scrambled to cover short, or previously sold, positions ahead of the long Easter holiday weekend.

One of the lessons behind those strong market fluctuations is that the strength—or more particularly, the weakness—of the US dollar against the euro and yen remains a major factor in the oil futures market, which some investment funds are using as a hedge against the dollar. The value of the dollars that they receive in payment for their crude also influences the euro buying power of members of the Organization of Petroleum Exporting Countries.

Also, the supply-demand balance of crude and petroleum products is so tight that even the threat of a possible disruption at a major refinery is enough to trigger a quick reverse in market trends. With US refineries running at nearly full capacity in recent years, the threat of such mishaps remains strong.

Record rig count
US drilling activity hit a 19-year high this week with 1,331 rotary rigs working, Baker Hughes Inc. reported Mar. 24. That was 11 more than the previous week, up from 1,150 a year ago, and the highest weekly total since late February 1986, when 1,376 rigs were drilling.

Meanwhile, analysts at Raymond James & Associates Inc. report a tightening market for oil country tubulars, with prices up by $65/ton early this year. That could signal a physical limit to the surge in drilling activity.

(Online Mar. 28, 2005; author's e-mail: samf@ogjonline.com)


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