MARKET WATCH: Fed cuts rates; energy prices rebound

Sam Fletcher
Senior Writer

HOUSTON, Mar. 19 -- Energy prices rebounded Mar. 18 moments after the Federal Reserve Bank again cut its short-term interest rates, this time by three-quarters of a percentage point to 2.25%.

The cut was less than financial markets wanted, but enough to stimulate those wanting to hedge investments. Interest rate reductions usually reduce the value of US currency and encourage alternative investment in commodities such as oil and gold, driving up their prices. The US dollar hit a record low against the euro at the start of this week, with an exchange value of $1.5905.

The timing of the interest cut announcement by the Federal Open Market Committee, the Fed's policy-making arm, "did not leave much time for oil traders to act before the close [of trade on the New York Mercantile Exchange], and the $2/bbl gains in the last 5 min is illustrative of the current flat price volatility where $1/bbl is not seen as an expensive cost to put a position," said Olivier Jakob, Petromatrix, Zug, Switzerland.

Eitan Bernstein of Friedman, Billings, Ramsey & Co. Inc., Arlington, Va., said, "High crude oil prices have created concerns that US gasoline demand will fall, but it is important to keep in mind that US gasoline consumption typically rises by about 900,000 b/d, or 10%, from January through July and, so far this year, US gasoline consumption has followed historic trends."

Bernstein said: "Until the excess supplies start declining, margins are likely to remain soft, suggesting little growth in production and imports. US gasoline production typically rises heading into summer; however, this is partially due to a strong-margins environment inducing marginal producers to come on line. Additionally, US gasoline imports have been declining for over the past year as the Europe-US East Coast arbitrage premium has narrowed. One more factor likely to contribute to declining inventories is the replacement of winter-blend gasoline with summer-blend gasoline. The switchover typically takes place during March and April and results in gasoline margins rising sharply from seasonal lows."

On the basis of that supply and demand analysis, Bernstein said, "We are lowering our 2008 US average refining margin forecast from $14.50/bbl to $12/bbl, which implies a 32% year-over-year decline in margins and is consistent with the current NYMEX futures curve."

US inventories
The Energy Information Administration reported Mar. 19 commercial US crude inventories increased just 200,000 bbl to 311.8 million bbl in the week ended Mar. 14, down from a 6.2 million bbl jump the prior week. Wall Street analysts were anticipating an increase of 2.1 million bbl in the latest week. US gasoline inventories fell 3.5 million bbl to 232.5 million bbl in the same period vs. analysts' consensus that gasoline stocks would remain flat. Distillate fuel inventories dropped 2.9 million bbl to 113.5 million bbl, more than the expected 1.5 million bbl decrease. Propane and propylene stocks were down 300,000 bbl to 27.3 million bbl that week.

Imports of crude into the US fell 1.1 million b/d to 9.5 million b/d in the same period. Input of crude into US refineries declined by 195,000 b/d to 14.4 million b/d, with refineries operating at 83.8% of capacity. Gasoline production dropped to 8.7 million b/d and distillate fuel production fell to 3.8 million b/d.

Energy prices
After losing $4.27/bbl in the previous session, the April contract for benchmark US light, sweet crudes regained $3.74 to $109.42/bbl Mar. 18 on NYMEX. The May contract escalated $4.27 to $108.50/bbl. On the US spot market, West Texas Intermediate at Cushing, Okla., was up $3.74 to $109.42/bbl. The April contract for reformulated blend stock for oxygenate blending (RBOB) jumped 15.58¢ to $2.66/gal on NYMEX. Heating oil for the same month gained 6.95¢ to $3.14/gal.

The April natural gas contract shot up 31.4¢ to $9.41/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., lost 51¢ to $9.09/MMbtu.

In London, the May IPE contract for North Sea Brent crude increased $3.81 to $105.56/bbl. The April gas oil contract jumped by $17.75 to $975.25/tonne.

The average price for the Organization of Petroleum Exporting Countries' basket of 13 reference crudes lost $1.31 to $100.10/bbl on Mar. 18.

Contact Sam Fletcher at samf@ogjonline.com.

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