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Sufficient supply or possible shortage?

Sam Fletcher
Senior Writer

Energy prices fluctuated sharply in early May because of differing assessments of sufficient supplies or possible shortages of crude and petroleum products.

On May 8, the June contract for benchmark US light, sweet crudes popped up 79¢ to $62.26/bbl on the New York Mercantile Exchange—ending a 6-day losing streak, the longest so far this year—when three major pipelines in Nigeria were shut in after rebel attacks. The next day, however, the June crude contract dropped 71¢, following an Energy Information Administration report that commercial US inventories of crude had jumped 5.6 million bbl to 341.2 million bbl, near the upper end of the average range, in the week ended May 4. That jump was larger than expected by Wall Street analysts and marked the first increase in US crude inventories in 13 weeks. Nonetheless, gasoline inventories remained at the lowest level for that time of year in 16 years.

The June contact regained 26¢ to $61.81/bbl May 10 as market worries about possible fuel shortages in the approaching driving season pushed up prices for reformulated blendstock for oxygenate blending (RBOB) lifting other commodities with it. The June RBOB contract continued to rally, escalating by 9.52¢ to $2.33/gal on NYMEX.

June crude futures continued climbing to $62.37/bbl May 11 as the International Energy Agency in Paris called for the Organization of Petroleum Exporting Countries to increase crude production to prevent possible fuel shortages this summer. IEA officials are looking to OPEC to meet a 1.6 million b/d jump in world demand for petroleum products this June, since crude production from non-OPEC producers has been much lower than IEA's earlier overly optimistic forecasts. Fears of supply shortages were fanned by thinning gasoline inventories in the face of growing demand in the US and other major consumer countries.

IEA officials recently reported the sharpest first-quarter draw of petroleum products in 11 years, down to 2.6 billion bbl at the end of March among member states of the Organization for Economic Cooperation and Development. However, many OPEC officials have said they see no need to boost their oil production when the real problem is the lack of capacity to refine the current supply of crude.

Imports of crude into the US increased by 727,000 b/d to 11 million bbl during the week ended May 4, but the input of crude into US refineries increased only 74,000 b/d to 15.3 million b/d, with units operating at 89% of capacity as a result of recent accidents and the seasonal turnaround (OGJ Online, May 9, 2007).

Import data
OECD data for February started to show the effects of OPEC's production cuts, with imports of crude from the 12 affected producer countries down by 1.3 million b/d from a year ago. "OPEC's compliance to its production cuts has been better than expected, but its impact has been somehow softened by a warm winter making for a lesser Asian pull. The real test on the visibility of the OPEC crude cuts will start in coming weeks as Asia moves out of its refinery maintenance period while the Atlantic Basin refinery runs should continue to increase," said analysts at Petromatrix GMBH, Zug, Switzerland. "While Saudi Arabia is almost exactly at its cut mark, Iran, Venezuela, and Libya are still trailing," they said.

OECD Europe did not suffer as much, since it received higher volumes of Iran and Iraq crude, offsetting the reduced Saudi Arabian, Nigerian, and Algeria imports, the analysts said. "For a globally unchanged level, Algeria continues the trend seen in 2006 of diverting its export away from Europe and into the US," analysts said.

Petromatrix analysts said, "Compared to a year ago, European exports of gasoline have increased in January-February, mainly to Mexico as higher demand in Latin America has reduced regional exports to Central America. European gasoline exports have also increased to Africa (South Africa, Nigeria) and the Mediterranean (Tunisia, Lebanon, the former Yugoslavia) making for less barrels available to the US and Canada."

With European transportation fuel demand continuing to move away from gasoline to diesel, combined with a rebound in naphtha demand, analysts said, "The European refinery yield on gasoline also is lower vs. previous years. The US relies on Europe for the marginal supply of gasoline, but Europe is producing relatively less and shipping more of it to other destinations."

In other news, Andrea, the first named tropical storm of the 2007 hurricane season, was downgraded May 10 to a subtropical depression about 100 miles east-southeast of Jacksonville, Fla., and dissipated without posing any real threat to oil and gas facilities.

(Online May 14, 2007; author's e-mail:

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