Iranian crisis looms

Sam Fletcher
Senior Writer

Fearing an attempt to make atomic bombs, the United Nations Security Council demanded that Iran abandon its uranium enrichment program by the end of August or face international sanctions. Iran said Aug. 22 it will not stop that program but offered instead to participate in new talks with the West. It indicated it might cut its crude exports if sanctions are applied.

"The more important catalyst [for changes in energy markets as a result of this standoff] will most likely arrive after the Aug. 31 deadline that the UN has imposed," said analysts in the Houston office of Raymond James & Associates Inc. "If...this deadline is ignored, the big swing factor in oil prices will come when the ramifications for Iran are announced."

US inventories
Meanwhile, the approaching Sept. 4 US Labor Day holiday put downward pressure on fuel prices. The Energy Information Administration reported the first build in US gasoline inventories in 5 weeks, up by 400,000 bbl to 205.8 million bbl in the week ended Aug. 18. The market saw that as an indicator that peak summer demand was declining.

There was a less-than-expected decline in commercial crude inventories during the same period, down by 600,000 bbl to 330.4 million bbl. Distillate fuel inventories rose by 2.3 million bbl to 135.5 million bbl, with a large increase in ultralow-sulfur diesel and a build in heating oil. "The phase-in of new ultra-clean diesel is nearly complete," said Deborah White, an analyst with Societe Generale. Previous stocks of low-sulfur diesel were drained to less than 2 million bbl as of Aug. 18, "and the trend for ultralow-sulfur diesel stocks was rising," she said.

Crude imports into the US increased by 175,000 b/d to 10.2 million b/d during that week. The input of crude into US refineries increased by 169,000 b/d to 15.7 million b/d with units operating at 92.8% of capacity. Gasoline production increased slightly to 9.3 million b/d, while distillate fuel production increased to 4.1 million b/d.

The latest US inventory data were "soft, with oil product inventories rising relative to seasonal norms," said Paul Horsnell, Barclays Capital Inc., London. "On the positive side, gasoline demand has stayed above 9.5 million b/d for a ninth straight week and is expected to strengthen year-over-year given the recent fall in retail prices." Gasoline inventories were drawn east of the Rockies but built west of the Rockies "while gasoline output is still increasing counterseasonally," he said.

White reported West Coast crude stocks were drawn down because of lost production from Prudhoe Bay. Reduced imports and increased refinery runs have drawn crude inventories along the Gulf Coast. However, Petroleum Administration for Defense District [PADD] 2 in the Midwest, which includes the Cushing, Okla., delivery point for spot market crude and New York futures contracts, is now "bloated," with inventories "about 3 million bbl above the previous 5-year high," she said. "Little wonder that West Texas Intermediate is trading lower than [North Sea] Brent. US Gulf Coast and Midwest refiners need no more [crude], and Asia does."

Earnings projection lowered
Friedman, Billings, Ramsey Group Inc. (FBR), Arlington, Va., lowered its third-quarter earnings estimates for most of the refiners it follows "to account for the recent decline in refining margins, which we believe is the result of falling crude oil prices and a consensus view that refined product inventories are at 'comfortable' levels heading into autumn," said Jacques Rousseau, senior energy analyst. "While refined product inventories have risen due to higher levels of production and imports, demand has actually accelerated in the third quarter vs. the prior three quarters."

FBR's average US refining margin declined from its recent peak of $23/bbl on Aug. 2 to the current level of approximately $15/bbl. "Refining margins still remain well ahead of midcycle levels (our average refining margin over the 2003-05 period was $10.70/bbl)," Rousseau said. "Crude oil differentials have increased in recent weeks due to higher demand for light, sweet crude."

Imports of petroleum products since June 1 have been 27% higher than 2005 levels. "Imports surged due to record second-quarter 2005 refining margins and should decline in the coming weeks since margins have dropped and because a number of major refineries in Europe have scheduled maintenance in September," Rousseau said. "The rise to supply has overshadowed the positive demand trends that currently exist. For example, after essentially showing no growth during the first half of 2006, gasoline consumption has risen 1.6% in the third quarter to date vs. third quarter 2005 levels, despite the high retail prices."

(Online Aug. 28, 2006; author's e-mail:

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