MARKET WATCH: Falling inventory raises crude prices

Sam Fletcher
Senior Writer

HOUSTON, Dec. 20 -- Crude prices rose Dec. 19 ending a four-session losing streak on the New York futures market as the Energy Information Administration reported US crude inventories dropped to the lowest level since February 2005.

EIA reported commercial US crude inventories fell 7.6 million bbl to 296.9 million bbl during the week ended Dec. 14 vs. a consensus among Wall Street analysts of a smaller drop of 1.4 million bbl. US crude stockpiles have dropped a total 20 million bbl since Nov. 9. In the latest week, gasoline stocks grew by 3 million bbl to 205.2 million bbl vs. a consensus increase of 800,000 bbl. Distillate fuel inventories dropped 2.1 million bbl to 129.4 million bbl during the same period, while the market was expecting a decrease of 400,000 bbl (OGJ Online, Dec. 19, 2007).

Furthermore, heavy fog in the Houston Ship Channel this week delayed offloading of tankers and "may foretell another crude draw next week," said analysts in the Houston office of Raymond James & Associates Inc.

Paul Horsnell at Barclays Capital Inc., London, said, "For the first time since November 2004, US crude oil inventories are below their 5-year average. In absolute terms, at 296.9 million bbl, US commercial crude oil inventories are below 300 million bbl for the first time since February 2005.

"Since their peak in the last week of June, US crude inventories have fallen by no less than 57.1 million bbl," he added. "Given that over this period the system has also absorbed a volume of some 20 million bbl or so of crude previously held in offshore storage in the US Gulf, if anything, the headline figure of a 57.1 million bbl draw understates the speed of crude inventory attrition.

"The fall is more significant when you allow for the large minimum operating requirement in the US crude system (mainly crude oil pipeline fill)." Horsnell continued. "Our estimate would be that US crude inventories above minimum operating requirements have fallen from about 100 million bbl 6 months ago to about 40 million bbl now. In other words, usable discretionary inventories have now fallen by some 60% since the start of the third quarter."

The Societe Generale Group in Paris acknowledged, "Crude prices have been supported by the ongoing stock draws seen in the [member countries of the] Organization for Economic Cooperation and Development in November and the first half of December. According to preliminary data, combined crude and product inventories in the US, Europe, Japan, Korea, and Singapore fell by over 900,000 b/d in November. In addition, the Organization of Petroleum Exporting Countries has clearly demonstrated its intention to maintain a tight grip on crude supplies amidst an uncertain outlook for economic and oil demand growth."

SGG analysts said, "US product demand has not grown since May. Despite the stock draws, the physical market remains well-supplied, and anecdotal market reports indicate that refiners are relaxed about procuring cargoes for January and February. Their mood is no doubt influenced by refining margins, which have deteriorated significantly in the last couple of weeks, in all key regions. Just as importantly, mediocre margins are a current indicator of lukewarm product demand (even when surging freight rates are taken into account)."

They added, "Our supply and demand forecasts indicate that the first quarter of 2008 will be essentially balanced. As a result, the price support from stock draws seen in recent weeks will dissipate, and prices will fall, with West Texas Intermediate forecast to average $85/bbl in the first quarter.

Turkey and Iraq
Recent attacks by Turkish aircraft and troops against Kurdistan Workers Party facilities in northern Iraq fanned market fears of possible damage to an oil pipeline from Iraq to a Turkish export facility on the Mediterranean (OGJ Online, Dec. 19, 2007).

On Dec. 20, SGG analysts predicted, "Limited Turkish ground and air attacks against Kurdish separatists in northern Iraq will be intermittent but recurring. The Washington Post reported this week that the US military has set up a center in the Turkish capital of Ankara for sharing actionable intelligence with the Turkish military and is providing overhead imagery from reconnaissance aircraft and drones.

"The US appears to have agreed to provide this assistance in exchange for Turkish restraint in not mounting a major ground offensive this past autumn," the analysts surmised. "The US does not want to destabilize what has been a relatively calm area within Iraq. In addition, the US military in Iraq receives 70% of its air cargo and a third of its fuel supplies through Turkey, also according to the Washington Post."

They added, "Our view is that by being involved and by providing tacit approval for Turkish operations, the US feels that is maintains some degree of control over the situation. The Turkish military will probably continue to conduct limited air and ground attacks as and when they receive actionable intelligence from the US. We believe that this will continue intermittently at least through 2008, and that the oil markets will soon begin to shrug off these reports."

Energy prices
The new front-month February contract for benchmark US sweet, light crudes jumped by $1.16 to $91.24/bbl Dec. 19 on the New York Mercantile Exchange. The March contract gained $1.09 to $91.18/bbl. On the US spot market, WTI at Cushing, Okla., was up 55¢ to $91.05/bbl. Heating oil for January delivery escalated by 4.25¢ to $2.60/gal. The January contract for reformulated blend stock for oxygenate blending advanced 2.76¢ to $2.33/gal.

The January natural gas contract gained 3.8¢ to $7.18/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., advanced 1.5¢ to $7.17/MMbtu. EIA reported Dec. 20 the withdrawal of 121 bcf of natural gas from US underground storage in the week ended Dec. 14. That was below Wall Street consensus and compared with withdrawals of 146 bcf the prior week and 71 bcf during the same period a year ago. US gas storage now exceeds 3.17 tcf, which is 4 bcf below last year's level in that period but up 266 bcf from the 5-year average.

In London, the February IPE contract for North Sea Brent crude gained $1.36 to $91.48/bbl, again trading at a premium to WTI. Gas oil for January increased $2.25 to $814/tonne.

The average price for the Organization of Petroleum Exporting Countries' basket of 12 reference crudes inched up 13¢ to $87.38/bbl on Dec. 19.

Contact Sam Fletcher at samf@ogjonline.com

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