Energy commodity prices had a rocky ride in the first 3 days of June, starting with a surprise June 1 rally that seemed to defy market fundamentals as the July contract for benchmark US sweet, light crudes shot up by $2.63 to $54.60/bbl on the New York Mercantile Exchange.
"In dollar terms, this was the largest upward move in oil prices year-to-date, taking oil to its highest level since April," said analysts in the Houston office of Raymond James & Associates Inc. They correctly surmised that the initial oil price spike appeared "overdone." In the next trading session, the July contract fell by 97¢ to $53.63/bbl on NYMEX.
But the initial jump was "indicative of underlying oil market fundamentals that remain tight," said Raymond James analysts prior to the price retreat. "Recent US inventory builds seem to be moderating. The Organization of Petroleum Exporting Countries' excess capacity is still the lowest in 30 years. And just today, the Russian energy minister said that Russian oil production in May was stagnant for the 8th consecutive month. This is largely due to an ongoing production decline at the assets that are still owned by the embattled [OAO] Yukos."
In a separate report, Robert S. Morris, Banc of America Securities, New York, said, "OPEC is not expected to boost quotas at its upcoming June 15 meeting, although it continues to increase output to bolster inventories ahead of the expected 2 million b/d year-over-year fourth quarter surge in demand. Overall, our projections assume a slight build in US crude oil inventories throughout the year but with the geopolitical [and] limited-spare-capacity premium remaining near recent levels."
Raymond James analysts said, "The immediate cause of the oil spike appears to have been a 6% jump in heating oil prices." They cited market concern for distillate inventories, which are essentially unchanged from a year ago. "US demand for distillates is up about 3% year-over-year," they said.
Heating oil for July delivery rose by 9.05¢ to $1.54/gal June 1 on NYMEX.
Meanwhile, the Energy Information Administration reported June 2 that commercial US inventories of crude increased by 1.4 million bbl to 333.8 million bbl during the week ended May 27. That weekly report was delayed 1 day by the Memorial Day holiday in the US. Gasoline stocks increased by 1.3 million bbl to 216.7 million bbl during the same period. Distillate fuel stocks gained 700,000 bbl to 106.4 million bbl, with an increase in diesel fuel outstripping a surprising drop in heating oil, EIA officials said.
Crude imports by the US increased by 387,000 b/d to 10.7 million b/d during the same period. Input of crude to US refineries was up by 243,000 b/d to nearly 16.1 million b/d, with refineries operating at 96.2% of capacity. Gasoline production rose, while production of distillate fuel remained relatively flat. Recent refinery outages have not had "a material impact on supply of refined product, but the psychological effect has been positive for product prices and therefore crude," said Raymond James.
The build in US inventories reported by EIA was generally credited for the June 2 retreat in crude prices. But traders shrugged off that report and further strengthening of the US dollar as an unseasonable rally in heating oil helped jack crude futures prices above $55/bbl June 3. The July crude contract jumped by $1.40 to $55.03/bbl June 3 on NYMEX.
Traders reported strong demand for distillate fuelsheating oil, diesel, and jet fuelin the US, Europe, China, and other parts of Asia. US demand for distillate is about 5% greater than last year ago and outstripping demand growth for gasoline, said government officials.
Raymond James analysts, in a June 6 report, said, "We remain convinced that the oil market will remain tight over the next several years and beyond." They cited increases so far this year in US petroleum inventories and predicted further gains but at slower rates during the next 4-6 weeks.
"However, the data clearly shows that (1) the recent builds have been manifested almost exclusively in the US; (2) inventories remain below 10-year highs; and (3) inventories are below average on a relative (days of supply) basis," they said.
Moreover, inventory builds "are necessary if US oil demand is to be met in the second half of 2005 and into 2006," the analysts said. "As domestic demand ramps up over the next 6 months, the recent builds will be worked off."
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