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MARKET WATCH: Political tension, lower inventories hike energy prices

Sam Fletcher
Senior Writer

HOUSTON, Dec. 28 -- Crude prices climbed in a fourth consecutive session Dec. 27 on the New York market with the escalation of geopolitical tensions following the assassination of former Pakistani Prime Minister Benazir Bhutto.

Leader of opposition to the current Pakistan government, Bhutto and at least 20 other people died in a suicide bombing at a political rally. Pakistan is not a major oil producer but it does have nuclear weapons, which could be a factor in a Middle East dispute.

In other news, the US Energy Information Administration reported commercial US crude inventories dropped 3.3 million bbl to 293.6 million bbl in the week ended Dec. 21—the lowest level in nearly 3 years. US gasoline stocks increased by 700,000 bbl to 205.9 million bbl during the same period, while distillate fuel fell 2.8 million bbl to 126.6 million bbl (OGJ Online, Dec. 27, 2007).

"US crude oil inventories have fallen further below their 5-year average, having now fallen in absolute terms by more than 60 million bbl since the end of June," said Paul Horsnell at Barclays Capital Inc., London. US crude stocks "are still falling relative to normal seasonal patterns despite the continuation of low refinery utilization rates," he said. "What was, as recently as July, a 40 million bbl build in total US oil inventories above their 5-year average has now disappeared completely. Crude inventories at Cushing, Okla., have not managed to achieve the usual scale of end-year seasonal build, and they are ending 2007 at a level some 33% lower than that at which they ended 2006."

The latest implied gasoline demand is 9.446 million b/d—"the highest figure since the seasonal peaks in August and enough to turn what had been a year-over-year decline for December-to-date into a year-over-year increase," Horsnell said. "Despite a 25% rise in retail prices and gathering economic pessimism, US gasoline demand now looks set to record the 26th straight month of year-over-year increases. Distillate demand for December-to-date is running close to the all-time high for any month, with a very strong 7.1% year-over-year increase."

Horsnell said, "The most relevant question about $100/bbl [price for crude] is when and not if. Indeed, the latest US weekly data provide enough justification for another push up, given that they are very representative of the broad tightening trend that has been in place since July."

The latest EIA petroleum data "showed an overall decline to refined product inventories, which is not typical for this time of year," said Soleil-Back Bay Research analyst Jacques H. Rousseau. "The inventory drawdown was driven by the highest weekly demand level since February 2007, which is most likely a one time event due to holiday travel," he said.

Gasoline supply remains below average, "which could be the result of some refiners operating below capacity due to weak margins and because of lower imports due to a narrow US East Coast vs. Europe arbitrage spread," said Rousseau. "We remain cautious on the near-term outlook for the sector and believe that consensus earnings expectations for the fourth quarter of 2007 are too high, but we expect refining margins to rebound heading into the 2008 driving season."

Energy prices
The February crude contract for US light, sweet crudes soared as high as $97.79/bbl in early electronic trading Dec. 27 before closing at $96.62/bbl, up 65¢ for the day on the New York Mercantile Exchange. The March contract climbed 83¢ to $96.27/bbl. On the US spot market, West Texas Intermediate at Cushing was up 65¢ to $96.63/bbl. The January heating oil contract increased 3.91¢ to $2.68/gal on NYMEX. The January contract for reformulated blend stock for oxygenate blending (RBOB) gained 4.36¢ to $2.50/gal.

The January natural gas contract escalated by 12.6¢ to $7.17/MMbtu on NYMEX. On the US spot market, however, gas at Henry Hub, La., dropped 22.5¢ to $6.80/MMbtu. EIA reported Dec. 28 the withdrawal of 165 bcf of natural gas from US underground storage in the week ended Dec. 21. That was above the consensus of Wall Street analysts and compared with withdrawals of 121 bcf the prior week and 46 bcf during the same period last year. Storage is now slightly more than 3 tcf, down by 120 bcf from a year ago and up 220 bcf above the 5-year average.

In London, the February IPE contract for North Sea Brent advanced by 84¢ to $94.78/bbl. Gas oil for January gained $4 to $847/tonne.

The average price of the Organization of Petroleum Exporting Countries' basket of 12 benchmark crudes picked up 85¢ to $90.39/bbl on Dec. 27.

Contact Sam Fletcher at samf@ogjonline.com.


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