MARKET WATCH: Oil prices continue to climb on New York market

Sam Fletcher
Senior Writer

HOUSTON, July 17 -- Having blasted through market resistance at $73/bbl in the previous session, the August contract for benchmark US crude continued climbing to a new 11-month high above $74/bbl July 16 on the New York market.

The near-month gasoline futures contract fell more than 4%, however, on expectations of a government report this week of an increase in US gasoline stocks.

Meanwhile, speculation by investment funds continues to support higher oil prices in the New York market "no matter the news, data, or interproduct relative-value spreads," said Olivier Jakob, managing director of Petromatrix GMBH, Zug, Switzerland. "Products and especially gasoline are in a corrective phase, which translates into lower refinery margins," he said.

"The theme of resilient demand is for now not verified by the latest statistics, and the pattern on reformulated blend stock for oxygenate blending (RBOB) has shifted from 'correction' to 'liquidation,'" Jakob said, adding, "The August RBOB crack [the difference between the purchase price of crude oil futures and the sale price of gasoline and heating oil futures] has lost $10/bbl in 5 days and is also $10/bbl lower than last year. Heating oil, which for now had managed to follow more closely the strength in West Texas Intermediate, is also starting to show a rapidly correcting crack. We find that for WTI to be trading higher in such a negative price pattern on products and while [North Sea] Brent is also correcting down represents an increasing risk. The WTI positions are defended heavily but will be harder to be sustained if the strong correction on products continues."

Analysts in the Houston office of Raymond James & Associates Inc. reported crude futures prices were up July 17 in electronic trading before the start of the regular daily session on the New York Mercantile Exchange on "news" that the Organization of Petroleum Exporting Countries plans to maintain current production levels despite its recently increased demand forecast, up by 100,000 b/d to 31.1 million b/d in the fourth quarter. For months now, OPEC officials have said it would do no good to increase the amount of oil pumped to market when there is insufficient refining capacity to process it.

However, Raymond James analysts said, "Increased refinery operations, partly offset by speculation that the US Energy Department will report [on July 18] a build in US gasoline supplies, is also driving crude higher."

A hydrocracking unit at Valero Energy Corp.'s McKee refinery was reported to have restarted July 14 after being taken down for equipment failure. The 171,000 b/d refinery in Sunray, Tex., has been operating at 150,000 b/d since June. It shut down Feb. 16 when a fire in a deasphalter unit threatened four adjacent spherical propane tanks (OGJ Online, Feb. 21, 2007). On May 24, a fluid catalytic cracking unit was shut down for maintenance due to a problem with circulation of catalyst.

ExxonMobil Corp. also restarted a hydrocracking unit at its 565,000 b/d Baytown, Tex., refinery over the weekend. That was shut down June 23 to repair a leak.

The recovered refining capacity at the two facilities came too late, however, to affect DOE's upcoming report on US inventories and refining capacity through July 13.

In other news, Japanese refiners are reported to be considering a request from the state-run National Iranian Oil Co. to be paid in yen currency for future purchases of Iranian crude in an apparent attempt to reduce Iran's holdings of US dollars. International oil sales are priced in US dollars, which frequently have traded at a discount against the stronger Japanese yen and European euro in recent years. Japanese refiners are said to be reluctant to make the change as it offers no advantage to them. Meanwhile, Iran is still defying US and United Nations' sanctions over its nuclear power program.

Energy prices
The August contract for benchmark US light, sweet crudes gained 22¢ to $74.15/bbl July 16 on NYMEX. The September contract advanced by 10¢ to $74.23/bbl, but subsequent monthly contracts through June 2008 posted losses. On the US spot market, WTI at Cushing, Okla., was up 22¢ to $74.16/bbl. The August RBOB contract fell 9.86¢ to $2.13/gal on NYMEX, the lowest closing for a front-month RBOB contract since mid-June. Heating oil for the same month declined 5.5¢ to $2.06/gal.

The August natural gas contract dropped 28.6¢ to $6.38/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., was down 10.5¢ to $6.26/MMbtu. Raymond James analysts said natural gas prices were flat in premarket trading July 17 "on forecasts for below-normal temperatures and lower demand in the key consuming markets of the Midwest and Northeast." They said, "Increasing storage and a lack of sustained heat to boost cooling demand continue to put downward pressure on natural gas prices."

In London, the August IPE contract for North Sea Brent crude, declined 24¢ to $77.33/bbl. Gas oil for August gained $2.50 to $657.50/tonne.

The average price for OPEC's basket of 11 benchmark crudes increased 34¢ to $72.83/bbl on July 16.

Contact Sam Fletcher at samf@ogjonline.com.

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