Energy prices seesaw in early March

Sam Fletcher
Senior Writer

Energy prices dipped in profit taking Mar. 2, ending a stretch of consecutive gains over the seven previous trading sessions that pushed the April contract for benchmark US light, sweet crudes to a closing of $62/bbl Mar. 1 on the New York Mercantile Exchange.

Such a long stretch of consecutive gains previously had not occurred "since last year early in the summer," said Olivier Jakob, managing director of Petromatrix GMBH, Zug, Switzerland. Although market fundamentals remained strong with rising demand for gasoline and continued geopolitical concerns about Iran's nuclear program, a slide in Asian and European equity markets triggered a steeper drop in crude prices Mar. 5 to a near 2-week low of $60.07/bbl. Coming on the heels of the Mar. 1 fall in equity prices on the Shanghai Composite Exchange, the later market losses increased fears of a global economic weakness that could adversely affect oil demand.

However, energy prices rebounded Mar. 6, regaining some of the losses over the two prior sessions, as global stock markets partially recovered from their weeklong declines. The April crude contract climbed to $62.10/bbl in intraday trading Mar. 7 before closing at $61.82/bbl, up $1.13 for the day, following reports of unexpected large drops in US crude and gasoline inventories.

Energy inventories
Gasoline inventories fell by 3.75 million bbl to 216.4 million bbl in the week ended Mar. 2, vs. industry expectations of a 1.5 million bbl draw. Crude stocks dropped 4.85 million bbl to 324.2 million bbl vs. an anticipated build of 1.8 million bbl. The Energy Information Administration said commercial US distillate fuel inventories declined by 1.3 million bbl to 123.2 million bbl, with a drop in heating oil more than compensating an increase in diesel. Propane and propylene inventories dropped by 3.2 million bbl to 28.7 million bbl (OGJ Online, Mar. 7, 2007).

Imports of crude into the US fell by 650,000 b/d to less than 8.9 million b/d during that period, due in part to fog delays along the Houston Ship Channel. Yet the input of crude into US refineries increased by 141,000 b/d to nearly 14.8 million b/d, with units operating at 85.8% of capacity. Gasoline production declined slightly to 8.6 million b/d, while distillate production increased above 4 million b/d.

"Total inventories, adjusted for demand, are below the 3-year average. In total, refined product inventories declined by 5.4 million bbl last week and are now at 25.2 days of forward demand cover, below the 3-year average of 25.9 days," said Jacques Rousseau, senior energy analyst at Friedman, Billings, Ramsey Group Inc., Arlington, Va.

The fall of crude inventories was counter-seasonal and primarily the result of a 540,000 b/d decline in imports along the Gulf Coast, due to weather-related delays in lightering operations in the Houston Ship Channel. "But there is also a genuine compression of imports in progress. On a 4-week average, US crude oil imports are now down to what is a 2-year low outside of hurricane�affected weeks [in 2005]," said Paul Horsnell at Barclays Capital Inc., London. "Much of the latest draw in crude might work its way back into the data, [although] inventories have never recovered even close to their levels before the Houston Ship Channel delays of December," he said.

"The larger-than-expected draw in gasoline inventories, with motor gasoline demand above 5-year highs, stoked investor concerns surrounding supplies as we approach the summer driving season," said analysts in the Houston office of Raymond James & Associates.

"The latest US weekly data have now shown product inventories falling by 5 million bbl or more relative to their 5-year average for 3 straight weeks. Initial figures for the whole of February show demand growing at the fastest rate for more than 10 years," Horsnell said. "The overall level of inventories has over the past 4 weeks now drawn by 28.2 million bbl faster than the normal seasonal pattern, (i.e., at a rate of 1 million b/d). This has taken the total of US commercial inventories down to its lowest level since May 2005."

EIA subsequently reported the withdrawal of 102 bcf of natural gas from US underground storage in the week ended Mar. 2. That was within the consensus of Wall Street analysts and compared with withdrawals of 132 bcf the previous week and 85 bcf during the same period a year ago. It reduced US gas storage to 1.6 tcf, down by 268 bcf from year-ago levels but 194 bcf above the 5-year average. However, Raymond James analysts expect gas storage to end the winter season at 1.3-1.4 tcf despite moderate temperatures.

(Online Mar. 12, 2007; author's e-mail: samf@ogjonline.com)

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