Supply fears influence markets

Sam Fletcher
Senior Writer

The June contract for benchmark US light, sweet crudes topped $65/bbl in intraday trading May 17 on the New York Mercantile Exchange as unexpected shut-ins of US refining capacity "sent shock waves through the markets," analysts said.

Among the disruptions that week, BP PLC said it might delay the restart of a 52,000 b/d gasoline-production unit at its Toledo refinery in Ohio. ConocoPhillips announced it shut in one of three crude units at its 194,000 b/d refinery in Ponca City, Okla., ahead of scheduled turnaround, and that some units at its Sweeny, Tex., refinery were operating at reduced rates. Valero Energy Corp. shut in 64,000 b/d of gasoline production at its Houston refinery for a week.

Meanwhile, analysts in the Houston office of Raymond James & Associates Inc., said, "Above-average weekly gasoline inventory draws this year have left traders skittish regarding gasoline supplies, now 7% below the 5-year average, as we quickly approach this summer's driving season" at the end of May. The American Automobile Association reported the US average retail price for regular unleaded gasoline gained 1.5¢ to a record high of $3.129/gal on May 18, just a week before the US Memorial Day weekend. US pump prices for regular gasoline had advanced 26¢/gal total within 30 days.

The June crude contract traded as high as $65.09/bbl on May 17 before closing at $64.86/bbl, up by $2.31 for the day. The June contract for reformulated blend stock for oxygenate blending (RBOB) jumped by 9.96¢ to $2.44/gal the same day, but it dropped to $2.41/gal in profit taking on May 18. Crude continued climbing to $64.94/bbl.

At that point, crude prices had remained above $60/bbl for almost 2 months on the New York market, despite a high degree of volatility from session to session. "We continue to believe that rising global demand, coupled with minimal excess production capacity from the Organization of Petroleum Exporting Countries and increasing visibility of geopolitical risks, are likely to drive oil prices even higher as 2007 progresses," said Raymond James analysts.

Moreover, the North Sea Brent crude contract on the International Petroleum Exchange—now viewed by many as a more accurate benchmark than US crudes on NYMEX—rallied above $70/bbl, representing a $5/bbl premium to benchmark US crudes. In London, the new front-month July IPE contract for Brent crude jumped by $2.30 to $70.27/bbl on May 16 but fell back to $69.43/bbl during profit taking in the next session.

Meanwhile, the value of the US dollar fell against that of most other major currencies after China widened the band in which the yuan can fluctuate against the dollar. That means that crude, which is priced universally in dollars, is cheaper outside the US economy, and similarly reduces OPEC's oil revenue vs. the euro paid for European goods.

Natural gas
Natural gas futures rose above $8/MMbtu May 17 on NYMEX "on fund buying," said analysts at Enerfax Daily. "Speculative traders have been trying to push the market above $8[/MMbtu] but have found higher prices difficult to sustain amid mild weather," the analysts said. Investment funds wanted to escape from the trading range so technical market triggers would kick in to force prices higher. Hedge funds, who had been betting that the price of June natural gas futures would fall, had to buy long positions ahead of warmer weather, analysts said.

The June natural gas contract traded as high as $8.14/MMbtu in the NYMEX session before closing at $8.08/MMbtu, up 18.5¢ for the day. On the US spot market, gas at Henry Hub, La., gained 10¢ to $7.71/MMbtu. On May 18, prices dropped to $7.94/MMbtu on NYMEX but climbed to $7.89/MMbtu at Henry Hub.

Raymond James analysts reported, "[LNG] imports to the US continue to come in at elevated levels as a result of the remaining supply overhangs in Asia and Europe. However, we believe that increased gas demand fueled by a rising price incentive to burn natural gas over crude derivatives, combined with increased liquid stripping and declining imports from Canada should help offset the increase in [LNG] imports during this injection season."

Analysts at Enerfax Daily said Canadian gas supplies to the US in June may be 600 MMcfd below last year's levels. "Companies cut their drilling budgets last year as prices dipped and well costs soared," they said.

Meanwhile, Raymond James reported May 17, "The natural gas 12-month strip has reached $9/Mcf for the first time in over 8 months; and as such, gas producers can now hedge winter 2007-08 volumes at an appetizing price of over $10/Mcf."

(Online May 21, 2007; author's e-mail: samf@ogjonline.com)

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