Volatile but robust energy prices to continue, analysts say

Paula Dittrick
Senior Staff Writer

Crude oil futures prices for August delivery settled at $60.54/bbl on June 27 on the New York Mercantile Exchange—marking the first time crude oil has settled at $60 or higher since NYMEX began trading oil futures in 1983.

Then, the crude oil price declined for three consecutive sessions, settling at $56.50/bbl on June 30, down by $4.04/bbl from its record settlement.

Analysts called the market nervous, saying they expect volatile but robust oil and natural gas prices to continue.

Standard & Poor's analyst John Thieroff said, "Worldwide petroleum demand growth is projected to remain strong during 2005 and 2006, implying that oil has not yet hit a price level that would cause demand destruction."

Thieroff doubts spare production capacity worldwide will expand significantly for 2 years. For some time, traders have expressed nervousness that there is only spare worldwide production capacity of 1-1.4 million b/d.

Stephen Smith of Stephen Smith Energy Associates in Natchez, Miss., expects oil prices are in a pattern where the NYMEX closing periodically hits $60/bbl or more, prices retreat for a few days, and then regain strength before falling again.

"Oil market nervousness about the ability of world oil supply to meet demand has now become a durable and deeply embedded market concern," Smith said in a June 28 research report.

Noting spare worldwide production capacity of 1-1.4 million b/d, Smith said volatility appears to be a rational market response.

"In this environment, it should also be no surprise that we are now experiencing the unusual combination of above-normal [Organization for Economic Cooperation and Development] storage levels combined with unusually high oil prices," Smith said. "In this situation, when the adequacy of production capacity becomes the central market issue, the temporary adequacy (or even abundance) of oil in storage becomes a less important price determinant."

He added, "Any system utilization over 97-98% allows the market to envision countless scenarios for shortage, and to price these various scenarios into and out of the market on a month-to-month basis."

Inventory reports
The US Energy Information Administration reported June 29 that commercial US crude inventories rose by 1.1 million bbl to 328.5 million bbl during the week ended June 24. Gasoline stocks increased by 300,000 bbl to 216.2 million bbl, while distillate fuel inventories gained 1.7 million bbl to 113.2 million bbl during the same period.

Almost all the increase was seen in heating oil inventories, and diesel inventories held fairly steady, EIA said.

US crude oil imports averaged nearly 11 million b/d for the week ended June 24, up 794,000 b/d from the week ended June 17 to 10.97 million bbl. EIA noted the June 24 numbers were the second highest weekly average of US crude oil imports.

Crude input into US refineries for the week ended June 24 increased by 315,000 b/d to 16.3 million b/d with refineries operating at 96.3% of capacity, said EIA.

Any one of a number of concerns is apt to trigger price hikes in the near future, traders and analysts agree.

They said one factor contributing to recent robust oil prices was the election of Mahmoud Ahmadinejad, a conservative, as Iran's president. Ahmadinejad's election is seen as possibly contributing to increased tension in the region after he takes office in August.

When asked by Washington, DC, reporters about Ahmadinejad on June 26, US Sec. of Defense Donald Rumsfeld said, "He is no friend of democracy; he is no friend of freedom. He is a person who is very much supportive of the current ayatollahs."

(Online July 4; author's e-mail: paulad@ogjonline.com)

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