The April contract for benchmark US light, sweet crudes blew past $61/bbl to a 7-week high in intraday trade Feb. 22 in New York, following reports of a precipitous drop in US gasoline inventories and stronger defiance by Iran of the United Nations deadline to end its uranium enrichment program.
UN officials said Iran ignored earlier sanctions for noncompliance and proceeded with the installation of a centrifuge and construction of a heavy-water reactor.
Taking the front-month position in the Feb. 21 trading session, the April contract climbed past $60/bbl for the first time in 2007 to close at $60.07/bbl that day. It traded at $59.61-61.25/bbl before closing at $60.95/bbl Feb. 22.
"Oil prices have extended the rally off the lows to more than 20%. With a global tightening in progress combined with disappointing non-OPEC supply news, strong demand, and a worsening geopolitical background, we expect the push-up to continue further," said Paul Horsnell at Barclays Capital Inc., London.
Olivier Jakob, managing director of Petromatrix GMBH, Zug, Switzerland, said, "The [previous $57-60/bbl trading] range on crude oil has now been broken, and with higher highs and lows [and a] higher closing trading above the moving averages, the positive momentum is back into oil and should attract further momentum investment." With market resistance to crude prices of $60.80-$61/bbl now broken, Jakob said, the next major level of resistance would be $63.80/bbl.
The Energy Information Administration reported commercial US crude inventories jumped by 3.7 million bbl to 327.6 million bbl in the week ended Feb. 16 after dropping a total 1 million bbl over the 2 prior weeks. US gasoline stocks fell by 3.1 million bbl to 222.1 million bbl in the same week. Distillate fuel inventories dropped 5 million bbl to 128.3 million bbl.
"The latest US weekly data are again extremely strong, with product inventories falling by 7.6 million bbl relative to their 5-year average. Demand remains strong across the board, with distillate and total demand both running at all-time record levels," Horsnell said. "Gasoline inventories have continued to come back closer into bounds, while heating oil inventories are now below their 5-year average. With 2 months of draws still expected, heating oil inventories are likely to finish the season well below last year's level, and they stand a reasonable chance of finishing below the 5-year average."
EIA's weekly statistics "are showing that in terms of days of cover the whole US complex is now below last year," Jakob said. "While most of the focus is on gasoline and middle distillate, the days of cover for the same week in kerosene are the lowest since 1997, and stocks of residual fuel oil have been steadily drawing back to below last year."
Jakob suggested gains in the energy market "need to be put in the context of a global commodity rally where corn closed at 10-year highs" Feb. 21-22, while gold futures prices were "at the highest level since May-June." Corn is the primary feedstock for the US manufacture of ethanol, a gasoline additive and the primary ingredient in the 85-15% blend of ethanol and gasoline to create the E-85 alternative fuel.
Natural gas outlook
EIA also reported the withdrawal of 223 bcf of natural gas from US underground storage in the week ended Feb. 16. That was at the low end of the consensus among Wall Street analysts and compared with withdrawals of 259 bcf the previous week and 123 bcf during the same period a year ago. It left a little less than 1.9 tcf of gas in storage, down by 296 bcf from levels at this time a year ago but 182 bcf above the 5-year average. US temperatures during that week were just over 30% colder than last year and the 10-year average, but nearly 8% warmer than the prior week.
The consensus estimate of 2% growth in US natural gas production in 2007 is "too optimistic," said Adam Sieminski of Deutsche Bank AG, New York. "Hurricane-adjusted US gas production has risen by only 1 bcfd over the past year in the Lower 48 states. This represents just 1% output growth despite 16% growth in the rig count," he said. Meanwhile, big production jumps in Wyoming in October-November "actually seem to be masking stagnation or month-to-month declines in Louisiana, Oklahoma, New Mexico, and Texas," Sieminski said. "We see a strong likelihood that North American gas production will disappoint this year, given a stagnating US rig count, accelerating decline rates, and behind-the-scenes braking by the private operators."
(Online Feb. 26, 2007; author's e-mail: firstname.lastname@example.org)