MARKET WATCH
Crude futures price slips from record highs

Sam Fletcher
Senior Writer

HOUSTON, July 7 -- The front-month crude futures contract slipped from record highs but remained above $75/bbl July 6 in the New York market following reports of a larger-than-expected drop in US crude inventories and an unexpected build in gasoline stocks.

The Energy Information Administration said commercial US crude inventories dropped 2.4 million bbl to 341.3 million bbl in the week ended June 30. However, US gasoline stocks rose by 700,000 bbl to 213.1 million bbl in the same period, while the consensus among Wall Street analysts was for an 800,000 bbl decline (OGJ Online, July 6, 2006). Gasoline inventories have increased in 9 of the 10 past months.

The latest rise in gasoline stocks was due to a 300,000 b/d increase in gasoline imports, said Jacques Rousseau, senior energy analyst at Friedman, Billings, Ramsey Group Inc., Arlington, Va. The latest US government data show increased growth in demand for gasoline, "which is now 1.3% above year-ago levels over the past 4 weeks vs. the 0.8% 4-week gain reported last week," he said. "We expect positive momentum to continue in the sector through July due to strong refining margins and since many refiners should report record quarterly earnings for the second quarter."

Total product demand in the latest period increased by 200,000 b/d primarily because of increased consumption of gasoline and jet fuel. Total refinery output was down by 100,000 b/d in the same period. Refinery utilization fell from 93.8% to 93.1% as a result of the oil spill in the Calcasieu waterway that disrupted operations at four refineries near Lake Charles, La.

Record gasoline demand
"With just 1 day of the initial June data yet to come, US gasoline demand for the month stands at 9.502 million b/d. That is the highest level ever recorded for any month," said Paul Horsnell, Barclays Capital Inc., London, in a July 7 report. "To have demand rise by 1.3% in the face of a sustained 30%-plus rise in prices implies that the short-run sensitivity to price is pretty low and that the sensitivity to income growth is pretty high."

For 11 consecutive weeks, the US retail pump price for regular unleaded gasoline has averaged $2.86-$2.95/gal. "This has meant that the impact of gasoline prices on monthly price indices has been very benign recently," Horsnell said. However, he said, "The magic range is likely to be broken fairly swiftly, with the average likely to head on up to and beyond $3/gal." But he expects little reaction from US motorists. "Prices close to $3 are establishing themselves as a norm, and a return to that average is unlikely to bring about the fuel-saving experiments that occurred in the wake of the hurricanes [in August-September 2005]. People tried car-sharing back then, and most seem to find that they did not like it very much," he said.

Energy prices
The August contract for benchmark US light, sweet crudes dipped 5¢ from the previous session's all-time highs to close at $75.14/bbl after trading at $74.30-75.35/bbl July 6 on the New York Mercantile Exchange. The September contract increased by 4¢ to $76.20/bbl. On the US spot market, West Texas Intermediate at Cushing, Okla., was down 5¢ to $75.14/bbl. Heating oil for August delivery on NYMEX slipped by 0.1¢ to remain relatively static at $2.06/gal. Gasoline for the same month lost 1.68¢ to $2.26/gal.

On the other hand, futures prices for corn—currently the commodity of choice for the manufacture of ethanol to replace methyl tertiary butyl ether as an oxygenate blend in reformulated gasoline—are on the rise due to hot weather and lack of rain in the Midwestern farm states.

The August natural gas contract lost 10.1¢ to $5.66/MMbtu, nearing a 2-year low as US storage continues to increase. EIA reported the injection of 73 bcf of gas into US underground storage in the week ended June 30. That was up from 66 bcf the previous week and a revised injection of 65 bcf during the same period last year. US gas storage now exceeds 2.61 tcf, up by 424 bcf from year-ago levels and 591 bcf above the 5-year average.

"The oil-to-gas parity ratio has gone haywire at 13.3:1 due to geopolitical and macroeconomic factors boosting crude and inventory surplus and mild weather concerns weighing down heavily on natural gas," said analysts in the Houston office of Raymond James & Associates Inc. "The crude-to-gas price ratio has not been so high since 1995."

Traders on NYMEX have "already priced in record high summer-ending storage levels and bearish scenarios for even the 2006-07 winter-ending storage," said Raymond James analysts. "We foresee the downside from these levels to be quite limited and would like to highlight the numerous catalysts that should work to push up natural gas prices: normal summer weather, hurricanes, more switching, and return of price-sensitive demand."

In London, the August IPE contract for North Sea Brent crude increased by 10¢ to $74.08/bbl. However, the July gas oil contract lost $1.25 to $637/tonne.

The average price for the Organization of Petroleum Exporting Countries' basket of 11 benchmark crudes increased by 82¢ to $68.74/bbl on July 6.

Contact Sam Fletcher at samf@ogjonline.com.

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