Low-sulfur diesel part of US inventory rise

Sam Fletcher
Senior Writer

US inventories of distillate fuel rose by 1.8 million bbl to 120.7 million bbl in the week ended June 2, with a large increase in ultralow-sulfur diesel fuel (ULSD) more than compensating for a decline in regular diesel as heating oil inched higher, the Energy Information Administration said.

That June 7 report indicates that US refiners and transport companies are complying with the Environmental Protection Agency's June 1 deadline for production of diesel with a maximum sulfur content of 15 ppm, down from 500 ppm previously. The new standard applies initially to 80% of the highway diesel produced by most refiners. Deadlines for ULSD sales are September in California and October elsewhere

Commercial US crude inventories increased by 1.1 million bbl to 346.6 million bbl during that same week. Gasoline stocks gained 1 million bbl to 210.3 million bbl during the first week of the 2006 summer driving season, still in the lower half of the average range for that time of year.

Imports of crude by the US increased by 39,000 b/d to 10.9 million b/d in the week ended June 2. Input of crude into US refineries was up by 115,000 b/d to 15.6 million b/d, with refineries operating at 91% of capacity. However, US gasoline production declined slightly to 9.1 million b/d, while distillate fuel production increased slightly to 4.1 million b/d.

Those latest figures "showed year-over-year gasoline demand growth remaining positive, despite near-record-high US average retail gasoline prices," said Jacques Rousseau, senior energy analyst at Friedman, Billings, Ramsey Group Inc., Arlington, Va.

Iran, Iraq, Nigeria
Energy prices fell June 6-7 amid positive feedback from Iran to incentives offered by the five permanent members of the United Nations Security Council (China, France, Russia, UK, and US) along with Germany to get Iran to postpone its uranium enrichment program.

Those incentives involve the first direct negotiations between the US and Iran since 1979. They also offer Iran an opportunity to reintegrate into global commerce. In return, Iran must agree to strict inspections to make sure its nuclear program can't produce nuclear weapons. "Seasoned diplomats are skeptical that this deal will be agreed, and relatively toothless sanctions suggest a military confrontation could still occur," said Adam Sieminski of Deutsche Bank AG, New York. "The $10/bbl premium in oil that reflects potential for a serious disruption in supplies may not go away anytime soon."

Energy prices declined June 8, with the near-month crude futures contract still hovering above $70/bbl in New York, on reports Al-Qaeda leader Abu Musab al-Zarqawi died in a bombing attack by US aircraft in Iraq.

Meanwhile, rebels staged another attack on oil field facilities in Nigeria's Niger Delta, kidnapping five South Korean contractors. The Movement for the Emancipation of the Niger Delta (MEND) said they would exchange those hostages for Mujahid Dokubo-Asari, a militia leader on trial for treason. They are also demanding the release of Diepreye Alamieyeseigha, a former governor of Bayelsa state who was impeached and arrested for money-laundering. MEND warned that attacks will increase in frequency, targeting principal facilities that are crucial to the oil industry.

The world crude market remained "tight in terms of spare capacity and tightening further with strong demand and weak supply within the context of a significant increase of supply-side risks," said Paul Horsnell with Barclays Capital Inc., London. Risks of crude shortages and higher prices "appear to be gathering at the border like Attila's hordes. This is, in our view, a market that is currently far more likely to shock with a sharp upwards move [in prices] than it is likely to surprise with any sustainable sharp correction downwards," he said.

Natural gas
EIA reported June 8 the injection of 77 bcf of natural gas into US underground storage during the week ended June 2. That was below the consensus of Wall Street analysts and down from injections of 80 bcf the previous week and 105 bcf during the same period in 2005. US gas storage now exceeds 2.3 tcf, which is up by 452 bcf from a year ago and 678 bcf above the 5-year average.

However, Adkins noted "the conspicuous arrival of a summer that is significantly hotter than the same period last year (on a cooling degree-day basis)." On that basis, US weather last week was 120% warmer than a year ago, 78% warmer than the prior week, and 44% warmer than the 10-year average.

"Electricity and natural gas demand has risen visibly, and the injection estimate is low relative to last year. This may be a bullish catalyst for natural gas," said Adkins.

(Online June 12, 2006; author's e-mail: samf@ogjonline.com)

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