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Tightening market boosts crude price

Sam Fletcher
Senior Writer

After declining earlier in the month, crude futures prices began to climb June 21 on the New York market, following a lower-than-expected build in commercial US crude inventories, and closed at a 7-week high just under $74/bbl June 30, the last trading session for that month. Traders expressed concerns over possibly tight gasoline supplies during an expected record increase in driving during the Fourth of July US holiday.

US gasoline stocks inched up by only 300,000 bbl to 213.4 million bbl during in the week ended June 16, well below the level expected by Wall Street analysts. The switch from methyl tertiary butyl ether (MTBE) to ethanol as an oxygenate in reformulated gasoline kept refineries down longer than normal for spring maintenance.

When many analysts lowered their expectations to a small build the following week, gasoline inventories instead fell by 1 million bbl to 212.4 million bbl during the week ended June 23 (OGJ Online, June 28, 2006). Commercial US stocks of crude dropped 3.4 million bbl to 343.7 million bbl during the same period.

That latest report of inventories "suggests that US gasoline demand remains reassuringly robust in the face of lofty prices at the pump," said analysts July 3 in the Houston office of Raymond James & Associates Inc. "This propped up front-month crude by $2/bbl in the next 3 days. With no clear catalyst in sight today, however, we would expect crude to trend lower modestly."

On June 30, the August contract for benchmark US sweet, light crudes closed at a 7-week high of $73.93/bbl, up 41¢ for the day, after trading as high as $74.15/bbl during the session, the highest intraday price for the front-month crude contract since June 5 on the New York Mercantile Exchange.

Gasoline pushes markets
"Gasoline has been the key market driver recently, having risen more than any other commodity over the past week," said Paul Horsnell with Barclays Capital Inc., London, in a June 28 report.

"There has been much talk of gasoline demand weakening, but the latest weekly reading is, at 9.54 million b/d, the highest [level of demand] since last July. The June-to-date demand indication is now 9.456 million b/d, exceeding the highest demand ever recorded for a month (the previous high being 9.454 million b/d in August 2005)," he said.

US demand for gasoline was up by 0.8% in late June from year-ago levels. "But that is not that shoddy given the 30% year-to-year increase in retail prices, and it is also notable for being the fifth straight month of year-to-year demand increases," Horsnell said.

"It appears to us that while demand remains so strong it will take another swing up in imports to get the US gasoline market back into balance," he said.

Meanwhile, US imports of gasoline were still falling, with inventories particularly tight on the East Coast.

The latest available data on US gasoline inventories reported by the Energy Information Administration for the week ended June 23 didn't reflect fully recent disruptions of refinery operations around Lake Charles, La. The US Coast Guard reopened the Calcasieu Ship Channel to commercial vessels during daylight hours on June 30 for the first time since a June 19 spill of 47,000 bbl of oil at the 450,000 b/d Citgo Petroleum Corp. refinery at Lake Charles, La. The spill occurred when oil poured over the top of crude storage tanks' walls during heavy rainstorms, restricting traffic into and out of four area refineries. More than 37,000 bbl of spilled oil had been cleaned up as of June 30, the Coast Guard said.

As a result of the spill, production was reduced at the Citgo facility, ConocoPhillips's 425,000 b/d Lake Charles refinery, and Calcasieu Refining Co.'s 85,000 b/d unit. Pelican Refining Co.'s 15,000 b/d refinery shut down because the oil spill blocked its incoming supply. The US Department of Energy approved two loan requests totaling 750,000 bbl of crude from the Strategic Petroleum Reserve to two of the refineries shut off from supplies by the oil spill. That included 500,000 bbl to ConocoPhillips and 250,000 bbl to Citgo.

The rise in gasoline futures prices on NYMEX was dampened June 28 as the Coast Guard reopened Calcasieu Lake near Lake Charles. With the reopening of the connecting Calcasieu Ship Channel 2 days later, gasoline for July delivery fell by 9.27¢ to $2.20/gal on NYMEX.

Meanwhile, political tensions remain high between Iran and the five permanent members of the United Nation's Security Council plus Germany as various Iranian leaders responded negatively—but not finally—to incentives offered to encourage Iran to postpone its uranium-enrichment program.

(Online July 3, 2006; author's e-mail: samf@ogjonline.com)


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