Oil at center of US-Saudi meeting

Sam Fletcher
Senior Writer

HOUSTON, Apr. 25 -- President George W. Bush and Saudi Arabia's Crown Prince Abdullah were scheduled to meet Apr. 25 at the president's ranch in Crawford, Tex., to discuss what the US State Department described as a "big agenda" involving crude supplies, terrorism, and Middle East reforms.

US Sec. of State Condoleezza Rice earlier said the kingdom has been "responsible about increasing oil supplies." However, Bush was quoted in an interview with CNBC as saying, "I don't think they're pumping flat out. I think they're near capacity, and so we've just got, got to get a straight answer from the government as to what they think their excess capacity is."

Primarily about oil
Bush's meeting with Abdullah is primarily about oil, said Paul Horsnell, Barclays Capital Inc., London. "In advance of the meeting, President Bush has made what we believe is the most complete statement on oil ever made by a US leader, and certainly the most detailed premeeting briefing on the agenda for a discussion with Saudi Arabia," Horsnell said. "More surprisingly, particularly in advance of a diplomatic meeting and given the current context of oil market sentiment, he has also seemingly given the impression of raising a public query about official oil capacity estimates."

Horsnell reported, "There has been no particular reticence from Saudi Arabia in providing a figure for capacity. In particular, the statement that sustainable crude oil capacity is 11 million b/d has been made fairly repeatedly recently. In addition to the request for a statement of spare capacity, there will be other issues raised, including the impact of crude oil prices on the economy."

Bush's statements "did not concentrate solely on upstream issues and implicitly put much of the blame for higher gasoline prices on refining constraints," Horsnell noted.

US crude stocks decline
After 9 weeks of consecutive builds, the Energy Information Administration reported that commercial US crude inventories fell in the week ended Apr. 15 by 1.8 million bbl to 318.9 million bbl. US gasoline stocks fell by 1.5 million bbl to 211.6 million bbl in the same period. However, distillate fuel inventories remained unchanged at 104 million bbl, with a decline in diesel fuel counterbalancing a build in heating oil.

US imports of crude were down by 145,000 b/d to 9.7 million b/d during that period. However, the input of crude into US refineries increased by 137,000 b/d to 15.4 million b/d, with refineries operating at 91.8% of capacity. Gasoline production fell slightly to 8.7 million b/d, while distillate fuel production increased slightly to 4.1 million b/d.

"In judging the overall strength of US weekly data, we have often relied heavily on the . . . deviation of total inventories from their 5-year average," Horsnell said. "In those terms, the latest set of data is the strongest single set since the Hurricane Ivan-affected data of last September. Inventories fell relative to their 5-year average by some 7 million bbl. Although there have been very few weeks since September where that measure has fallen at all, that is still a significant tightening for 1 week."

However, he said, "Scratch away the surface of the data, and it does not appear to be that strong after all. The draw in crude oil was caused by a 3.5 million bbl draw on the (in oil terms) isolated West Coast. Where it matters, inventories continued to rise."

Horsnell noted, "The contango in crude is causing inventories to rise, but it is also sowing the seeds of its eventual destruction by compressing imports and encouraging higher refinery runs. Likewise, of the 1.5 million bbl draw in gasoline, 1.3 million bbl was on the West Coast. So again, the data is not as strong as the headline number. Heating oil inventories rose by a surprisingly large 1.4 million bbl while diesel inventories fell by an identical amount. In terms of production, US refining is still lagging. Gasoline production is still running lower [than a year ago], despite sharply higher cracks and higher overall refinery profit margins."

He said, "Given that, the hypersensitivity of gasoline prices to refinery glitches seems very rational indeed. Were demand to be running fast ahead, the system would be in severe trouble. As it is, higher [year-over-year] retail prices are achieving some results, even if the leverage gained from higher prices has been remarkably little so far. For April to date, US gasoline demand is running 0.7% higher [than last year]. There is some evidence of slowing demand, but it is not as conclusive yet as it was last year."

(Online Apr. 25, 2005; author's e-mail: samf@ogjonline.com)

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