The August contract for benchmark US light, sweet crudes pushed past $70/bbl June 29 on the New York Mercantile Exchange to its highest level in 10 months due to declines in US gasoline and distillate fuel supplies despite an increase in refining capacity.
That same contract traded as high as $70.52/bbl June 28 on NYMEX before closing at $69.57/bbl, up 60¢ for the day. On June 29, it climbed as high as $71.68/bbl in intraday trading before closing at $70.68/bbl. It was the first time a front-month crude contract closed above the psychological $70/bbl mark since August 2006.
"Crude oil has now been able to confirm a break out of the $70/bbl barrier that was keeping it in check since the beginning of the second quarter. If it is able to confirm the momentum, it would now set the next technical target at $75/bbl in a repeat of the July 2006 dynamics," said Olivier Jakob, managing director of Petromatrix GMBH, Zug, Switzerland. Trading was volatile June 28-29 due to "an oil triple witching with the [simultaneous] end of the week, end of the quarter, and expiry of the July product contracts," Jakob said.
The crude price dipped slightly in early trading July 2 but remained near a 10-month high after three consecutive weekly gains.
News from Iraq that a pipeline linking the southern oil fields to the Baghdad refinery was damaged by a bomb explosion helped push up energy prices in New York. "While the damaged pipeline shouldn't significantly hinder Iraqi supplies, it underscores the tense environment that contributes to the geopolitical risk premium in crude prices," said analysts in the Houston office of Raymond James & Associates Inc.
US inventory surprise
On June 27, the US Energy Department's Energy Information Administration reported gasoline inventories dropped 700,000 bbl to 202.6 million bbl in the week ended June 22 in conflict with the consensus expectation of 1 million bbl increase. It was the first draw on US gasoline inventories in 8 weeks. Distillate stocks fell 2.3 million bbl to 120.4 million bbl against the consensus expectation of a 600,000 bbl build. Crude inventories increased by 1.6 million bbl to 350.9 million bbl in the same week, reaching levels not seen since May 1998.
Imports of crude into the US fell 290,000 b/d to 10.5 million b/d in the week ended June 22. Yet the input of crude into US refineries increased by 408,000 b/d to 15.4 million b/d, as refining capacity utilization increased to 89.4% from 87.6% the prior week. Nonetheless, US gasoline production was "relatively flat" at 9.3 million b/d while distillate fuel production was "unchanged" at 4 million b/d, EIA reported.
The price of the August crude contract "moved up 80¢/bbl in the 60 sec that followed the release of the DOE report and managed afterwards to hold and improve on those gains," stopping the momentum of previous price erosion, Jakob said. It traded as high as $69.36/bbl before closing at $68.97/bbl, up by $1.20 June 27 to recoup much of its loss from the previous session.
"With both the US refinery utilization rate and gasoline inventory levels remaining well below the 5-year average, the draw in gasoline supplies has reignited concerns about adequate inventory levels," said Raymond James analysts.
Paul Horsnell at Barclays Capital Inc., London, reported, "US oil product inventories are now at the greatest deficit to their 5-year average since 2004." Assessing the gasoline market, he said, "Strong demand, falling imports, and flat output is not a great combination, and we continue to look for gasoline prices to push up towards their second peak of the driving season. Gasoline demand for June-to-date is averaging 9.551 million b/d, which is just 34,000 b/d lower than the all-time record for any month set last August."
"Despite US retail gasoline prices having averaged more than $3/gal during the past several weeks, demand remained 1.4% above comparable year-ago levels," said Eitan Bernstein of Friedman, Billings, Ramsey & Co. Inc., Arlington, Va.
Meanwhile, improved refinery utilization rates will help pull down the huge crude stockpiles in Cushing, Okla. "As these stockpiles continue to fall, West Texas Intermediate prices may soon exceed prices of Brent crude as they have historically done," said Raymond James analysts. In recent weeks, North Sea Brent crude has sold at an unusual premium to WTI.
Jakob, said, "No other energy commodity was able to follow the strong pace of WTI. Individual [in June 28 trading] and refining cracks continued to erode, and the Brent premium to WTI corrected sharply lower" during that week.
(Online July 2, 2007; author's e-mail: email@example.com)