MARKET WATCH: August crude tops $75/bbl on NYMEX

Sam Fletcher
Senior Writer

HOUSTON, July 19 -- The near-month crude futures contract closed above $75/bbl July 18 for the first time in 11 months on the New York market after the US Energy Information Administration reported the first drop in US gasoline inventories in 3 weeks.

"Against all odds and despite higher [refinery] utilization rate, gasoline stocks drew," said analysts at the Société Générale Group in Paris.

EIA reported US gasoline inventories fell 2.3 million bbl to 203.3 million during the week ended July 13. US crude stocks dropped 500,000 bbl to 352.1 million bbl in the same period. Distillate fuel lost 200,000 bbl to 122.2 million bbl (OGJ Online, July 18, 2007).

"US oil product inventories fell further below their 5-year average, with the distillate market continuing to tighten the most significantly," said Paul Horsnell at Barclays Capital Inc., London. US gasoline demand remains extremely strong, climbing to 9.71 million b/d in the latest week, "taking the reading for July-to-date to the highest ever recorded for any month," Horsnell said.

Speculation by investment funds is likely to drive prices higher on the futures market. "Open interest [the total number of contracts not yet liquidated by offset or delivery] continues to increase more in puts [options to sell] than calls [options to buy]," said Olivier Jakob, managing director of Petromatrix GMBH, Zug, Switzerland. The next price target will likely be $80/bbl if the front-month crude contract "manages to go through the record highs of last year," he said.

Horsnell said a key driver of crude prices this year has been the small growth of oil supplies in countries outside of the Organization of Petroleum Exporting Countries. "The Barclays Capital projection is for there to be no growth at all in non-OPEC supply in 2008; indeed the forecast shows a slight fall," he said. As a result, Barclays Capital has increased its 2008 price forecast for the benchmark US light, sweet crudes by $6.60 to an average $73.90/bbl. It increased its price forecast for North Sea Brent crude by $7.40 to an average $73.60/bbl.

Horsnell also noted that, after rising through 13 consecutive trading sessions, the average price for OPEC's basket of 11 benchmark crudes topped out at $72.82/bbl on July 16—"15¢ higher than the previous peak set in August 2006." The OPEC basket dropped to $71.89/bbl on July 17 but inched back up to $71.97/bbl on July 18. "Given the value of the basket is more representative of the bulk of world trade in oil than the main futures market indicators, this is perhaps a more important indicator of the new peak than the more visible gyrations of Brent and WTI," Horsnell said.

Analysts in the Houston office of Raymond James & Associates Inc. said July 19, "With the oil bulls having firm control over the oil market for the last few weeks, yesterday's [report of a] draw in both US gasoline and crude inventories, plus this morning's news of a supply disruption at Total's field in Angola, has added more fuel to the fire." Total SA said a failed generator forced the company to shut-in half of its 240,000 b/d production from the Dalia field in Angola.

Energy prices
The August contract for benchmark US light, sweet crudes jumped by $1.03 to $75.05/bbl July 18, just $3.35 below last year's all-time high of $78.40/bbl for a front-month contract on the New York Mercantile Exchange. "It seems like the record could be broken in the near future," said Raymond James analysts.

The September contract escalated by $1.19 to $75.30/bbl. On the US spot market, WTI at Cushing, Okla., was up $1.03 to $75.06/bbl. Heating oil for August delivery increased 7.18¢ to $2.11/gal on NYMEX. The August contract for reformulated blend stock for oxygenate blending (RBOB) gained 9.46¢ to $2.20/gal.

The August natural gas contract jumped 22.1¢ to $6.53/MMbtu on NYMEX. On the US spot market, however, gas at Henry Hub, La., dropped 3.5¢ to $6.27/MMbtu. EIA reported July 19 the injection of 65 bcf of natural gas into US underground storage in the week ended July 13. That was just below the consensus of Wall Street analysts and compares with injections of 96 bcf the prior week and 59 bcf during the same period last year. US gas storage now exceeds 2.69 tcf, down by 63 bcf from year-ago levels but 365 bcf above the 5-year average.

In London, the September IPE contract for North Sea Brent crude gained $1.23 to $76.76/bbl. Gas oil for August increased by $1.25 to $650.25/tonne.

Contact Sam Fletcher at samf@ogjonline.com.

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