MARKET WATCH: Arabian Sea cyclone churns energy prices

Sam Fletcher
Senior Writer

HOUSTON, June 5 -- Crude prices continued to climb June 4 as Tropical Cyclone Gonu churned through the Arabian Sea with the equivalent force of a maximum Category 5 hurricane, triggering fears it would disrupt shipments of a fifth of the world's oil.

Those fears eased June 5 after Gonu weakened to a Category 4 storm and appeared on track to miss most of the oil facilities in that region. "The current path of Tropical Storm Gonu in the Arabian Sea might disturb some ships but it does not cause any significant threat to crude oil production," said Olivier Jakob, managing director of Petromatrix GMBH, Zug, Switzerland. "The Muscat and Sohar refineries in Oman could be under stress, but they have been running below capacity as plagued with constant operational problems."

Jakob said, "Crude production should not be affected and even if Oman crude oil loading installations were to be affected, Saudi Arabia remains with enough short term capacity to fully offset any Omani losses. The Saudi Arabia proximity would ensure limited delays in cargoes redirection for alternate supply. The area of expected landfall in Iran is not an oil-producing region, and the landfall path remains for now well eastward of the Bandar Abbas refinery."

In Nigeria, Royal Dutch Shell PLC restored 150,000 b/d of crude production that had been shut in after villagers raided the Bomu Manifold facility. "Over a quarter of Nigerian exports remains halted, and attacks have continued on infrastructure and kidnappings, continuing to make Nigerian exports volatile and unpredictable," said analysts in the Houston offices of Raymond James & Associates Inc.

The recent strength in oil prices has been largely underscored by expectations of tight US gasoline supplies heading into the summer. "Although US crude oil inventories appear plentiful and are about even with a year ago, refiners have struggled to build gasoline stocks, which are 6% below the 5-year average," said Robert S. Morris, Banc of America Securities LLC, New York. At the same time, gasoline demand has remained quite resilient, which, combined with the relative inventory shortfall, has pushed the days of demand coverage for domestic gasoline to 9% below the 5-year average."

The Organization of Petroleum Exporting Countries seems to prefer that oil prices remain near current levels while the cartel appears to be more in the "driver's seat" with regard to managing price levels given that global crude oil demand growth should exceed non-OPEC supply growth this year, Morris said.

Good year for refiners
Although the summer season of peak gasoline demand has just begun, "it already looks like 2007 will be the best year yet for the independent refiners," said Eitan Bernstein, Friedman, Billings, Ramsey & Co. Inc., Arlington, Va. "Year-to-date," 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 (+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.

Energy prices
The July contract for benchmark US sweet, light climbed by $1.13 to $66.21/bbl June 4 on the New York Mercantile Exchange. The August contract gained $1.17 to $67.29/bbl. On the US spot market, West Texas Intermediate at Cushing, Okla., was up $1.13 to $66.22/bbl. Heating oil for July delivery escalated by 4.18¢ to $1.96/gal. The July contract for reformulated blend stock for oxygenate blending (RBOB) slipped by 0.66¢ but the closing price remained virtually unchanged at $2.24/gal.

The July natural gas contract shot up by 31.3¢ to $8.19/MMbtu May 4 on NYMEX, with commodity funds buying back previously sold positions at now lower prices. News that a second named tropical storm formed over the past couple of days in the Gulf of Mexico also helped stimulate the market, said Raymond James analysts. On the US spot market, gas at Henry Hub, La., escalated by 23.5¢ to $7.79/MMbtu. "Forecasts are calling for a very warm upcoming week, nearly 13% warmer than normal for this time of the year. Weak European natural gas prices in the near term continue to shift LNG shipments to the US, as Britain's Isle of Grain has not received any LNG shipments in over a month," Raymond James reported.

In London, the July IPE contract for North Sea Brent crude advanced by $1.33 to $70.40/bbl. The June gas oil contract gained $20 to $612.25/tonne.

The average price for OPEC's basket of 11 benchmark crudes increased by $1.16 to $65.63/bbl on June 4.

Contact Sam Fletcher at samf@ogjonline.com.

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