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Prices change with supply outlook

Sam Fletcher
Senior Writer

Crude futures prices dropped below $58/bbl Feb. 15 for the first time since November in New York, capping 6 weeks of unusually large increases in US inventories.

After falling for most of February, the March contract for benchmark US sweet, light crudes closed at $57.65/bbl Feb. 15 on the New York Mercantile Exchange. But by Feb. 17, it had rebounded to $60/bbl in intraday trading on NYMEX before closing at $59.88/bbl, up by $1.42 for the day. That move came as Venezuelan President Hugo Chavez threatened to stop crude supplies if the US were to "cross the line" in its relations with Venezuela.

Meanwhile, militants holding nine foreign hostages in southern Nigeria claimed Feb 20. they attacked another oil facility and blew up a military vessel (OGJ Online, Feb. 2, 2006).

Venezuela's oil minister earlier called for a cut of 500,000-1 million b/d in crude output by the Organization of Petroleum Exporting Countries when ministers meet Mar. 8 in Vienna. The group's current oil production quota of 28 million b/d was adopted last June for the 10 affected members. Iraq is not included in the quota since it's struggling to regain prewar production. Most analysts doubt OPEC will reduce production, however, with prices still high.

The US Energy Information Administration reported US crude stocks climbed by 4.9 million bbl to 325.6 million bbl during the week ended Feb. 10, the highest level since June 24, 2005. Gasoline inventories rose by 2.2 million bbl to 225.5 million bbl, while distillate fuel stocks increased by 900,000 bbl to 136.9 million bbl with a gain in diesel fuel offsetting a decline in heating oil.

Increased imports
US imports of crude increased by 404,000 b/d to 10.3 million b/d during the same period. Crude input into US refineries was up by 84,000 b/d to 14.6 million b/d, with the system operating at 86.1% of capacity. Production of both gasoline and distillate fuel declined, however.

US imports of crude and petroleum products were at the highest level ever for February. The EIA reported total US imports in the week ended Feb. 10 were 14.3 million b/d, up by 2 million b/d from year-ago levels.

Jacques Rousseau at Friedman, Billings, Ramsey & Co. Inc., Arlington, Va., sees signs that the build-up of US inventories is slowing despite higher imports. "This suggests that seasonally lower production is beginning to have a material impact on inventories," he said.

Paul Horsnell of Barclays Capital Inc., London, said, "We do wonder if the stage is not now being set for some larger-than-normal decreases at some point over the next couple of months." He noted that the current build of gasoline inventories is unique to the US. Gasoline inventories in Europe and Japan are 9 million bbl lower on average from year-ago levels, compared with a 3.8 million bbl increase in the US.

US demand for gasoline remained robust, supported by the strengthening economy and pending fall in retail prices to catch up with retreating US wholesale prices for gasoline. "US retail gasoline prices have begun what is likely to be a fairly steep descent over coming weeks," Horsnell said.

"It appears to us that the process has overshot," he said. "Instead of a gentle touch on the rudder, the market has delivered a move in wholesale prices that will pump demand up through lower retail prices, has closed all arbitrage windows and hence will depress imports down the line, and has also collapsed the profitability of refining in a way that will start to constrict supply."

Horsnell noted "the unprecedented pace of the crushing of gasoline cracks" [price differences between gasoline and crude futures] in recent weeks. As a result, Horsnell said, "The March gasoline crack has been sent into negative territory, having fallen by more than $5/bbl over the past week and by more than $10/bbl over the past 2 weeks." He said, "With the cracks falling away so sharply, the profitability of many refining operations has fallen below the opportunity cost of capital." More US refining capacity is expected to fall idle as a result, triggering a drawdown of gasoline inventories.

Meanwhile, Horsnell said, "One of the strange dislocations in recent weeks is that the oil market has become less concerned about Iran at precisely the same time as we detect that political analysts and diplomatic circles have become considerably more worried."

(Online Feb 20; author's e-mail: samf@ogjonline.com)


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