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Market waffles prior to driving season

Sam Fletcher
Senior Writer

Crude futures prices waffled during trading sessions prior to the extended Memorial Day weekend May 26-28 that marked the start of the US summer driving season.

The June contract for benchmark US sweet, light crudes gained $1.33 to $66.27/bbl May 21 on the New York Mercantile Exchange, the highest closing since Apr. 27. It traded at $64.80-66.35/bbl May 22 before expiring at $64.97/bbl in the biggest 1-day price decline since May 4. The new front-month July contract lost $1.36 to $65.51/bbl on May 22. It traded as high as $66.20/bbl May 23 before closing at $65.77/bbl. On May 24, it bounced between $63.82 and $66.15/bbl before closing at $64.18/bbl, the lowest level in more than a week, while in the UK North Sea Brent crude for July broke through $71/bbl, a 9-month high, before settling at $70.72/bbl.

"As a consequence, the Brent-West Texas Intermediate spread widened as much as $6.54/bbl," said analysts at Barclay's Capital, the investment banking division of Barclays Bank PLC, London.

Analysts in the Houston office of Raymond James & Associates Inc. said, "We continue to believe the Brent crude contract more accurately depicts the tight global oil market, along with underlying supply risks associated with Nigeria and Iran, and would expect this premium over WTI to dissipate once the localized glut is eliminated."

Traders ignored the loss of 100,000 b/d of production when BP PLC partially shut in Prudhoe Bay oil field May 22 after 20 bbl of water produced from the field leaked through a "pencil-sized" hole in a pipeline and was contained by BP. Officials expected to have the leak repaired within a week. That field normally produces 400,000 b/d.

US gasoline stocks increased by 1.5 million bbl to 196.7 million bbl in the week ended May 18, still well below average for the time of year. Commercial US crude inventories rose by 2 million bbl to 344.2 million bbl.

Valero refinery
On May 24, Valero Energy Corp. shut down part of its 158,000 b/d McKee refinery in Sunray, Tex., due to a catalyst circulation problem. "We are still evaluating the problem, but we expect the unit to be operating within 2 weeks. We expect that this will result in a loss of production of 30,000 b/d of gasoline and 3,000 b/d of jet fuel while the maintenance is ongoing. On the other hand, we will be able to increase production of ultralow-sulfur diesel at the plant by 11,000 b/d," said a company spokesman. "We expect to reduce crude rates slightly to 80,000 b/d. This issue will not affect our plans to increase overall throughput at the plant to 150,000 b/d by the end of June."

Meanwhile, Jerry Taylor, senior fellow at the Cato Institute, said US motorists had no reason to worry about fuel costs over Memorial Day. "High [gasoline] pump prices are not reducing demand because they are not imposing anything like the economic pain politicians allege," he said. Adjusting nominal 1949 gasoline prices of 27¢/gal for inflation, he said, "We get a price of $1.90/gal in today's terms. If we further adjust those prices by mean disposal income, we find that gasoline prices would have to be $6.68/gal before they were taking the same bite out of our wallets as they were in 1949. In 1962—a year writ large in the popular imagination as the quintessential year of muscle cars and cheap gasoline thanks to [the movie] American Graffiti—gasoline prices averaged 31¢/gal. When disposable income is considered, today's gas would have to cost $4.48/gal to be a comparable burden."

Taylor said, "The public likewise thinks of 1972 as the last year of energy innocence prior to the rise of the Organization of Petroleum Exporting Countries and the onset of shortage. Fuel prices in 1972 averaged 36¢/gal—a hefty $2.77/gal in today's terms. While still high, this price is not all that different than the prices we were paying earlier in the year."

The US sent nine warships through the Strait of Hormuz in a major show of force May 23. "The ships are anticipated to commence exercises after traversing the waters to reassure neighboring countries of US commitment to localized security (the move is said to be a symbolic demonstration, as opposed to an inciting flex of muscle)," said Raymond James.

Elsewhere, the US National Oceanic & Atmospheric Administration forecast a 75% chance that activity in the 2007 Atlantic hurricane season will be above average, with 13-17 tropical storms anticipated and 7-10 of these expected to develop into hurricanes and 3-5 expected to become major hurricanes.

(Online May 25, 2007; author's e-mail: samf@ogjonline.com)



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