MARKET WATCH
Crude prices rally following large fuel draws

Sam Fletcher
Senior Writer

HOUSTON, Mar. 22 -- US crude prices increased Mar. 21 following larger-than-expected draws from US gasoline and distillate fuel inventories and a decision by the Federal Reserve Bank not to raise interest rates.

"Crude oil spent most of the day under pressure but managed a late rebound from the support line with the help of strong gains from the equity markets reacting positively to the Federal Open Market Committee [the policy-making arm of the Federal Reserve] meeting," said Olivier Jakob, managing director of Petromatrix GMBH, Zug, Switzerland.

The new front-month crude contract rallied above $60/bbl during the Mar. 21 session on the New York market and continued to climb in early trading Mar. 22. "With refineries sluggishly coming out of maintenance season and gasoline demand still above the 5-year high, we expect gasoline inventories to hold an even heavier weight on oil prices heading into this summer. Aside from the rise in commodity prices, the energy sector also gained on a run-up in the broader markets, driven by the Fed's decision to leave short-term interest rates unchanged," said analysts in the Houston office of Raymond James & Associates Inc.

The US Energy Information Administration reported US gasoline inventories fell by 3.5 million bbl in the week ended Mar. 16 vs. a consensus Wall Street expectation of a 2 million bbl build, said Eitan Bernstein at Friedman, Billings, Ramsey Group Inc., Arlington, Va. Distillate inventories declined by 1.7 million bbl vs. a consensus for a 1.5 million bbl draw. Crude inventories rose by 3.9 million bbl vs. an expectation of a 1 million bbl build (OGJ Online, Mar. 21, 2007).

"Total refined product inventories are now 6% below comparable year-ago levels on an absolute basis and 9% below on a demand-adjusted basis, suggesting a tight supply-demand balance supportive of the current high refining margin environment," Bernstein said. Total refined product demand was effectively flat, up 20,000 b/d, or 0.1%, from the previous week. Demand for diesel increased 115,000 b/d. Residual fuel demand was up by 110,000 b/d, while demand for gasoline rose by 80,000 b/d. However, that was largely offset by drops of 155,000 b/d in consumption of jet fuel and 125,000 b/d of heating oil.

Paul Horsnell at Barclays Capital Inc., London, said, "The latest US statistics show a further fall in US oil product inventories down to just a whisker above their 5-year average. Total inventories have now fallen by more than 100 million bbl since the start of October, a decline that is about three times faster than the normal seasonal pattern." He said front-month North Sea Brent crude appears to be headed for an average price above $61/bbl in the nearly completed first quarter, with benchmark US crude futures averaging "very close" to $60/bbl.

Energy prices
The May contract for benchmark US sweet, light crudes traded as high as $60.13/bbl during the Mar. 21 session on the New York Mercantile Exchange before closing at $59.61/bbl, up 36¢ for the day. The June contract gained 48¢ to $61.11/bbl. On the US spot market, West Texas Intermediate at Cushing, Okla., was up by 63¢ to $57.37/bbl. The April contract for reformulated blend stock for oxygenate blending (RBOB) dropped 0.72¢ to $1.93/gal on NYMEX. Heating oil for the same month dipped by 0.41¢ but was virtually unchanged at $1.66/gal.

The April natural gas contract escalated by 25¢ to $7.16/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., increased by 4.5¢ to $6.84/MMbtu. "Technically driven buying combined with an overlying bullish sentiment in the energy markets to drive yesterday's 4% increase," said Raymond James analysts. "Stoking the rally further was a report issued by Tropical Storm Risk, forecasting increased hurricane activity in the Atlantic this summer."

EIA reported Mar. 22 the injection of 17 bcf of natural gas into US underground storage during the week ended Mar. 16. That was above Wall Street's consensus and compared with withdrawals of 115 bcf the previous week and 23 bcf during the same period in 2006. US gas storage now totals 1.53 tcf, down by 279 bcf from year ago levels but 239 bcf above the 5-year average.

In London, the May IPE contract for North Sea Brent crude gained 57¢ to $60.77/bbl. The April gas oil contract, however, lost $1 to $528.50/tonne.

The average price for the Organization of Petroleum Exporting Countries' basket of 11 benchmark crudes climbed by 27¢ to $56.76/bbl on Mar. 21.

Contact Sam Fletcher at samf@ogjonline.com.

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