Demand, price, and surprises

Sam Fletcher
Senior Writer

Energy futures prices skyrocketed to all-time highs on July 6, with crude topping $61/bbl on the New York Mercantile Exchange among fears that Hurricane Dennis might disrupt oil and gas production in the Gulf of Mexico.

The August contract for benchmark US sweet, light crude closed at $61.28/bbl July 6 on the NYMEX, up by $1.69 for the day to the highest settlement since that market began trading crude futures in 1983. During that session, the contract also hit an intraday high of $61.35/bbl. Gasoline and heating oil for August delivery each registered a record high intraday trading price and closing price, too (OGJ Online, July 7, 2005).

The storm sparked predictions that crude prices could go over $65/bbl and natural gas could surpass $8/MMbtu within days, especially if Dennis inflicted as much damage on offshore oil and gas facilities as did Hurricane Ivan in 2004.

The US Minerals Management Service said 359 offshore platforms and 86 rigs were evacuated ahead of the hurricane. It said production of 1.4 million b/d of oil and more than 6 bcfd of natural gas had been shut in as of July 11.

However, August crude fell to $59.63/bbl on July 8 as Hurricane Dennis veered east away from the primary producing area in the central Gulf of Mexico. Dennis came ashore July 10 as a Category 3 hurricane in the Florida Panhandle, apparently with little impact on offshore operations.

Refiners set records
The Energy Information Administration reported July 7 that US refiners set several operational records during the week ended July 1. Crude input into US refineries increased by 194,000 b/d to 16.5 million b/d, the highest weekly average ever. US refineries were operating at 98.1% of their capacity ahead of the extended Fourth of July weekend, "the highest weekly utilization rate since the week ended Jan. 1, 1999," said EIA officials. "Gasoline production increased some, averaging over 9.2 million b/d, and the highest weekly average ever. Distillate fuel production increased substantially, averaging 4.5 million b/d, the highest weekly average ever recorded."

The 9.7 million b/d "implied level" of US gasoline demand, based on EIA data, was the "highest weekly number ever," said Paul Horsnell, Barclays Capital Inc., London. The implied demand level of 9.5 million b/d of gasoline in June was the highest of any month in a period when "the retail price for regular unleaded averaged $2.156/gal," he noted.

Obviously, high prices have not yet impacted demand to any high degree. And the supply of petroleum products has managed to keep pace with demand because of high refinery utilization. "However, we doubt that the US refining system can sustain rates above 98% for long without something falling over, even if there were not a queue of hurricanes and tropical storms that are likely to have a significant impact...over the next couple of months," Horsnell said.

Commercial US inventories of crude fell by 3.6 million bbl to 324.9 million bbl during the week ended July 1. US gasoline stocks dropped by 900,000 bbl to 215.3 million bbl in the same period, while distillate fuel stocks jumped by 4 million bbl to 117.2 million bbl. US imports of crude dropped by 752,000 b/d to 10.2 million b/d the same week.

London bombings
The terrorist bomb blasts that killed 49 people and wounded hundreds more in London on July 7 also blew energy futures prices off their record highs. With the first news of the attacks, the August contract for benchmark US crude plummeted from an intraday high of $62.10/bbl to a low of $57.20/bbl before rebounding to $60.73/bbl on NYMEX.

Some traders obviously feared that the terrorist attacks on three subway trains and a bus would trigger at least a general fear of travel, if not an economic downturn, that would affect global demand for energy. Crude prices fell 40% in the months following the Sept. 11, 2001, terrorist attacks on New York and Washington, DC.

However, Horsnell said, "There are times when a market response should not be overrationalized. That [initial] response is typical of what a fairly febrile market can do when faced with a shock, and the sharp fall was a major overshooting. In our view, to have at the time put that response down to views on the likely impacts of global growth and oil demand would have been at best disingenuous."

Some analysts also said energy markets were adversely affected by the large build of distillate fuel inventories during the previous week.

(Online July 11, 2005; author's e-mail: samf@ogjonline.com)

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