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Analyst: Good year for independent refiners

Sam Fletcher
Senior Writer

Although the summer season of gasoline demand in the US has barely started, Eitan Bernstein of Friedman, Billings, Ramsey & Co. Inc., Arlington, Va., said, "It already looks like 2007 will be the best year yet for the independent refiners."

As of the first week of June, he said, "US refining margin indicators have averaged 37% above comparable year-ago levels and, with gasoline inventories near record lows, rising demand, and ongoing supply constraints, we believe that the current high refining margin environment is likely to continue with any unexpected supply disruptions producing price spikes. Additionally, it is important to note that the issues that contributed to the current supply situation (i.e., rising demand, an aging refinery fleet, more stringent environmental regulations, and a stretched labor force) suggest that the broader upward trend in refining margins may continue longer than most investors expect."

Gasoline inventories will likely remain low through the summer, said Bernstein. "US gasoline inventories have fallen by nearly 15% over the past few months and are now 5% below comparable prior-year levels. This is due to a combination of strong domestic consumption growth (plus 1.7% year-to-date), a heavier-than-normal spring maintenance season, and a decline from last year's record import levels. While inventories have recently begun rising, they remain well below comparable year-ago levels and will likely stay low through the summer."

He said US gasoline inventories would have to increase a total of 9 million bbl over the next 3 months to catch up to 2006 levels by the end of summer. "However, over the past 3 years, gasoline inventories have fallen by an average of 10 million bbl during the summer months, with the best year having shown no change in inventories and the worst year having experienced a 27 million bbl drop, as a very active Gulf of Mexico hurricane season materially reduced production," Bernstein said.

The US Energy Information Administration reported a larger-than-expected jump in commercial US gasoline stocks, up 3.5 million bbl to 201.5 million bbl in the week ended June 1, the latest period available before deadline. That "marked the fifth straight rise in US gasoline inventories; however, the sluggish return and string of refinery maintenance issues, combined with strong gasoline demand, has left gasoline inventories significantly below the 5-year average," said analysts in the Houston office of Raymond James & Associates Inc.

Interest rates
Despite some earlier bullish indicators, crude futures prices suffered a moderate loss in the week ended June 8 as investors' concerns that higher interest rates could slow economic growth triggered a slump across the commodities markets in the last trading session.

Crude prices rallied earlier in the week as Cyclone Gonu threatened Middle East oil supplies, reports circulated of a Turkish invasion of Iraq, and officials of the Organization of Petroleum Exporting Countries again said they would react only to supply and demand fundamentals, not high oil prices. "In the end, there has been so far no report of Gonu-linked damages to oil installations, Turkey did not invade Iraq, and the OPEC statement is a repeat of what they have been saying for more than a year," said Olivier Jakob, managing director of Petromatrix GMBH, Zug, Switzerland.

However, he said, "The market is in a phase of reacting to bullish items and discounting their nonconfirmation. As long as it stays in that mode it will find further supporting items such as strikes in Nigeria or Brazil but will need at one stage some confirmation of the disruption premium it is adding to the flat price."

Such confirmation was not forthcoming as Oman's only oil terminal resumed operations June 8 after being closed for 3 days by the dissipating Cyclone Gonu. But a price decline on June 8 was tempered in early trading "by news that Norway's mature oil fields reduced their monthly production by 7.4%, a downward trend that we expect to continue," said Raymond James analysts.

The July contract for benchmark US light, sweet crudes escalated by $1.13 to $66.21/bbl June 4 on the New York Mercantile Exchange. Cyclone Gonu churned through the Arabian Sea with the force of a Category 5 hurricane, potentially threatening shipments of a fifth of the world's oil through the nearby Strait of Hormuz. The contract dropped 60¢/bbl in profit-taking on June 5. But it recouped 35¢/bbl in the next session and gained 97¢ to $66.93/bbl June 7, the highest front closing price in more than a month on NYMEX. On June 8, however, it fell $2.17 to $64.76/bbl, down 32¢/bbl for that week.

(Online June 11, 2007; author's e-mail: samf@ogjonline.com)


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