MARKET WATCH
SPR plan drives up crude futures price

Sam Fletcher
Senior Writer

HOUSTON, Jan. 24 -- For the first time in 2 weeks, the front-month crude futures contract closed above $55/bbl Jan. 23 on the New York market shortly after Sec. of Energy Samuel W. Bodman announced plans to double the amount of oil in the US Strategic Petroleum Reserve to 1.5 billion bbl by 2027.

Official confirmation of that plan came later in the evening in President George W. Bush's state of the union speech to Congress. Bodman promised the additional crude would be acquired by the government at a rate of 100,000 b/d "in a manner that does not adversely affect the market or raise gasoline prices." DOE already planned an 11 million bbl replacement of previously drawn SPR stocks, officials reported.

Established in 1975 following an embargo on oil shipments to the US from the predominately Muslim members of the Organization of Petroleum Exporting Countries, SPR consists of government-owned oil stored in salt caverns primarily along the Gulf Coast for use in case of severe supply disruptions. It now holds 691 million bbl of crude, equivalent to 55 days of net US imports. Increasing it to 1.5 billion bbl would provide 97 days of supply protection and would require expansion of current SPR facilities.

"SPR has not been buying oil since the hurricanes in the fall of 2005, so these purchases would be a boost to oil demand (though small relative to total US oil demand of about 20 million b/d)," said analysts at the Houston office of Raymond James & Associates Inc.

Half of the Jan. 23 crude price gain came in the last 30 min of trade on the New York Mercantile Exchange when the DOE plan was announced. But the market momentum was already "shifting from downwards to upwards" in earlier trading during that session, as forecasts of colder weather lifted natural gas futures price to the highest level in 6 weeks, and pulled up prices for crude and petroleum products, said Olivier Jakob, managing director of Petromatrix GMBH, Zug, Switzerland.

Also contributing to higher energy prices were escalating tensions over Iran's continued nuclear activities, continued violence in Nigeria, a weakening dollar, and expectations of the first decline in distillate supplies in 6 weeks.

"By making an increase in oil reserves a foreign policy strategy, it is more likely than not that it will also push other aspiring superpowers (China and India) to increase their plans for strategic reserves, creating additional long term demand," Jakob said. "Shorter term it gives an excuse to OPEC to shy away from action on a flat price increase as the blame can be put on the strategic refill. OPEC's role is to ensure a stable price to the consumer but not necessarily to the building of strategic stocks that could potentially be used to cushion future action against them."

US inventories
Meanwhile, the US Energy Information Administration said Jan. 24 that commercial US crude inventories (excluding SPR) increased for the second time in 10 weeks, up by 700,000 bbl to 322.2 million bbl during the week ended Jan. 19, following a 6.8 million bbl jump the prior week.

Gasoline stocks rose by 4 million bbl to 220.8 million bbl last week. Although expected to fall, distillate fuels gained 700,000 bbl to 142.6 million bbl, with a decrease in heating oil offset by an increase in diesel fuel.

Imports of crude into the US declined by 1.2 million b/d to 9.8 million b/d during the same period. Input of crude into US refineries fell by 205,000 b/d to 14.9 million b/d with units operating at 87.4% of capacity. Gasoline production was relatively flat at 9.1 million b/d while distillate fuel production decreased to 3.9 million b/d.

Energy prices
The new front-month March contract for benchmark US light, sweet crudes closed at $55.04/bbl, up by $2.46 for the day, after trading at $52.41-55.15/bbl on NYMEX. The April contract gained $2.38 to $55.91/bbl. On the US spot market, West Texas Intermediate at Cushing, Okla., was up by $2.76 to $53.90/bbl. Heating oil for February delivery increased by 6.79¢ to $1.58/gal on NYMEX. The February contract for reformulated blend stock for oxygenate blending (RBOB) climbed by 7.19¢ to $1.45/gal.

The February natural gas contract gained 27.8¢ to $7.60/MMbtu on NYMEX, having traded as high as $7.66/MMbtu during that session. On the US spot market, gas at Henry Hub, La., was up 21¢ to $7.38/MMbtu.

In London, the March IPE contract for North Sea Brent crude increased by $2.40 to $55.10/bbl. But gas oil for February lost $5.50 to $485/tonne.

The average price for OPEC's basket of 11 benchmark crudes slipped by 11¢ to $49.52/bbl on Jan. 23.

Contact Sam Fletcher at samf@ogjonline.com.

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