Crude oil price volatility misleading

Sam Fletcher
Senior Writer

Waffling prices seemed unusually volatile in crude futures markets in the second quarter when actually "the exact reverse is true," said Paul Horsnell with Barclays Capital Inc., London.

Front-month contracts for benchmark US light, sweet crudes traded from a high of $75.35/bbl to a low of $65.60/bbl on the New York Mercantile Exchange, closing at $70.87/bbl on June 23. "That range of $9.75/bbl is the smallest in absolute terms for any quarter over the past 2 years," Horsnell said. "Expressed as a percentage of the average price, at 14% the trading range this quarter has been the lowest for 35 quarters, i.e., it has been the least volatile, at least on this measure, since the third quarter of 1997."

He further noted, "Prices have stayed rather neatly in the $65-75/bbl range that we believe has taken over from the previous $60-70/bbl range. There has been no particular trend; just a series of oscillations within bounds, producing what we would classify as the calmest quarter of the whole decade to date."

The average NYMEX crude futures price for April-June "looks as if it will come out just a shade above $70/bbl, beating the previous record of $63.48/bbl, set in the first quarter of 2006 by more than 10%," said Horsnell. Although one might surmise from some reports that commodity prices had collapsed during the quarter, he said, "The reality is that the quarter has seen a significant shift upwards, has laid the $60-70/bbl trading range to rest for the moment, and has created a new set of daily, weekly, monthly, and quarterly record highs."

Gasoline stocks
The Energy Information Administration said US gasoline stocks inched up by 300,000 bbl to 213.4 million bbl during the week ended June 16, primarily because of growing demand and lower imports of gasoline stocks and blends. Commercial inventories of US crude increased by 1.4 million bbl to 347.1 million bbl in the same period, the latest reported prior to deadline. Distillate fuel inventories rose by 1.7 million bbl to 124.5 million bbl (OGJ Online, June 21, 2006).

"The seasonal stock build appears to be coming to end," Horsnell said. US gasoline demand for June so far is averaging a very robust 9.429 million b/d, up from year-ago levels and "still very close" to the 9.54 million b/d record set last August, he said.

For 9 consecutive weeks, US retail gasoline prices have remained within the narrow band of $2.86-2.95/gal for the national average price of regular unleaded, Horsnell reported June 21.

However, Olivier Jakob, managing director, Petromatrix GMBH in Zug, Switzerland, said the recent change in gasoline specifications makes it "a bit more difficult" to read gasoline demand numbers reported weekly by EIA. "We have seen recently some very high imports of gasoline and blending components in the [US] Northeast. If there is any misreporting of the stock number because the importers are not sure about the classification of the blending component, the high imports and relative low stock number make for an over-estimation of the calculated demand," he said.

Jakob agreed with EIA that US gasoline demand is still increasing, albeit at a lower than normal rate. "The latest data from the US Department of Transportation would also point to a growth in travel which is only moderate," he said.

"Despite near-record-high retail gasoline prices, over the past 4 weeks, US gasoline consumption has averaged 0.9% above comparable prior-year levels, above last week's 0.6% gain," said Jacques Rousseau, senior energy analyst at Friedman, Billings, Ramsey Group Inc., Arlington, Va. "The Department of Energy projects that US gasoline prices will average $2.61/gal during the second half of 2006 and miles driven will accelerate to above the 1% growth level."

Natural gas
Ronald J. Barone, UBS Securities LLC, New York, said storage operators have begun notifying customers of injection limits because injection rates are beginning to test capacity. "El Paso's ANR Pipeline Co. and Southern Natural Gas Co., for example, recently moved to limit injections for some interruptible customers and warned that storage availability could be further curtailed," Barone said June 23. "The peaking capacity paints an interesting fundamental picture for gas prices."

EIA said 79 bcf of gas was injected into US storage in the week ended June 16, up from 77 bcf the previous week, but down from 80 bcf a year ago. US gas storage is at 2.5 tcf, 451 bcf above year-ago levels and 643 bcf above the 5-year average. Barone said an injection pace of 7.11 bcfd to reach 3.4 tcf of gas in underground storage by Nov. 1.

(Online June 26, 2006; author's e-mail: samf@ogjonline.com)

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