MARKET WATCH
Low gasoline build buoys energy prices

Sam Fletcher
Senior Writer

HOUSTON, June 22 -- Energy prices rebounded June 21 with a government report of a smaller-than-expected build in US gasoline inventories and diminishing hopes for a peaceful settlement with Iran over its uranium enrichment program.

Iranian President Mahmoud Ahmadinejad said his government would respond by mid-August to incentives offered June 6 by the five permanent members of the United Nations Security Council—China, France, Russia, the UK, and the US—along with Germany. Those countries want Iran to postpone its uranium enrichment program, pending inspections to ensure that it is not part of a plan to manufacture nuclear weapons.

US President George W. Bush expressed impatience that Iran wants to take so long to respond to what he described as a "reasonable deal."

Gasoline stocks
The US 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 reduced 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. 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," said Paul Horsnell with Barclays Capital Inc., London. 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.

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."

Energy prices
The new front-month August contract for benchmark US sweet, light crudes gained 99¢ to $70.33/bbl June 21 on the New York Mercantile Exchange. The September contact was up by $1.02 to $71.03/bbl. On the US spot market, West Texas Intermediate at Cushing, Okla., jumped by $1.76 to $70.70/bbl. Gasoline for July delivery escalated by 6.04¢ to $2.07/gal on NYMEX. Heating oil for the same month increased by 2.97¢ to $1.94/gal.

The July natural gas contract gained 8.6¢ to $6.59/MMbtu June 21. On June 22, EIA reported the injection of 79 bcf of gas into US underground storage in the week ended June 16. That was within the consensus of Wall Street analysts, up from an injection of 77 bcf the previous week, but down from the revised injection of 80 bcf in the same period last year. US gas storage now approaches 2.5 tcf, 451 bcf above year-ago levels and 643 bcf above the 5-year average.

Just prior to the latest EIA report, analysts at the Houston office of Raymond James & Associates Inc. said, "Eight out of the last 10 weeks have produced [natural gas] injection numbers more bullish than the Street was expecting as price-induced fuel-switching has clearly reentered the market given the lower gas prices."

In London, the August IPE contract for North Sea Brent crude increased by $1.09 to $69.17/bbl. However, the July gas oil contract slipped by 75¢ to $612.75/tonne.

Contact Sam Fletcher at samf@ogjonline.com.

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