MARKET WATCH: Energy prices regain from losses

Sam Fletcher
Senior Writer

HOUSTON, June 7 -- Energy prices June 6 on the New York market regained some of the losses of the previous session despite a bearish government report on US inventories.

The US Energy Information Administration said commercial US inventories of crude inched up just 100,000 bbl to 342.3 million bbl in the week ended June 1 (OGJ Online, June 6, 2007). But there was a larger-than-expected build in gasoline stocks—up 3.5 million bbl to 201.5 million bbl. "This is highly unusual given that total gasoline production and imports declined by roughly 140,000 b/d [during the week]," said Eitan Bernstein of Friedman, Billings, Ramsey & Co. Inc., Arlington, Va.

That, he said, "suggests timing issues or other inconsistencies." He said, "While gasoline inventories have risen by some 8 million bbl over the past several weeks, we note that this is consistent with seasonal trends and reiterate our view that inventories will stay low throughout the summer and the current high refining margin environment will continue."

Analysts in the Houston office of Raymond James & Associates Inc. said the latest inventory report "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."

Meanwhile, Cyclone Gonu weakened to a tropical storm in the Middle East but still halted for the third consecutive day crude shipments from Oman.

In other news, energy prices were supported in early trading June 7 by reports that Turkish forces raided into northern Iraq against Kurdish guerillas. US and Turkish authorities later denied those reports.

Paul Horsnell at Barclays Capital Inc., London, reported June 6 that Turkey had massed its forces "along what passes as the border" with Iraq several times in recent years. "Indeed, before the change of regime in Iraq, it had pushed troops across the border in large numbers, the most recent large movement being 10 years ago," Horsnell said. "The issue here is not so much a Turkish incursion in itself or the size of that incursion. The issue is more the continuing question as to the medium and longer-term stability of the north of Iraq, most particularly if centrifugal forces do cleave Iraq into pieces." Horsnell is worried that Democratic presidential candidates "calmly talk about dismemberment" of Iraq.

That's only one in "a series of vignettes, all providing a glance at a future where stability of energy supplies might become a very serious concern," Horsnell said. Another is the "continuing degradation of relations" between Russia vs. the US and Europe. "While the rhetoric for the deepening mistrust is being conducted in terms of missile shields, missile targeting, democratic conditions, and the extradition or not of suspects, it is hard not to see Russia's relations with the rest of the world as having a central girder of energy flows," Horsnell said.

He also is concerned about US policy towards Iran. "US Presidential candidates in public debate talk about the pros and cons of a preemptive nuclear strike against Iran," he noted.

Energy prices
The July contract for benchmark US light, sweet crude recouped 35¢ to $65.96/bbl June 6 on the New York Mercantile Exchange. The August contract regained 25¢ to $66.99/bbl. On the US spot market, West Texas Intermediate at Cushing, Okla., was up 35¢ to $65.97/bbl. Heating oil for July delivery increased by 0.93¢ to $1.97/gal on NYMEX. The July contract for reformulated blend stock for oxygenate blending (RBOB), however, lost 1.69¢ to $2.19/gal.

The July natural gas contract inched up 1.6¢ to $8.08/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., advanced 2.5¢ to $7.85/MMbtu. EIA reported the injection of 110 bcf of natural gas into US underground storage in the week ended June 1. That surpassed the consensus among Wall Street analysts and was up from 107 bcf the previous week and 77 bcf during the same period last year. US gas storage now exceeds 2.16 tcf, down by 146 bcf from last year but 366 bcf above the 5-year average.

In London, the July IPE contract for North Sea Brent crude increased by 57¢ to $71.02/bbl. "The Brent contract remains above $71/bbl, an 8% premium to the [NYMEX] oil contract," said Raymond James analyst. The June gas oil contract lost 50¢ to $611.50/tonne.

The Vienna office of the Organization of Petroleum Exporting Countries closed June 7 for a public holiday, so an update of OPEC's basket price was not available.

Contact Sam Fletcher at samf@ogjonline.com.

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