MARKET WATCH: Oil stock draw lowers energy prices

Sam Fletcher
Senior Writer

HOUSTON, June 26 -- An unexpected increase in US commercial crude inventories pushed down energy prices June 25, while the market shrugged off an anticipated decision by the Federal Reserve Board to maintain its 2% interest rate.

It was a "bloodbath" in early trading as crude and natural gas commodities and energy corporate stocks "were pounded," said analysts in the Houston office of Raymond James & Associates Inc. The bearish report on crude inventories "added to the profit-taking sentiment," they said. "However, the stocks and the commodities rallied to take back much of their losses later in the day. Crude is trading higher this morning, and recent strength can be attributed to a weaker dollar (following the Fed's decision not to raise interest rates) and Libya claiming it may cut production."

In terms of the number of commodity trades, however, Olivier Jakob at Petromatrix, Zug, Switzerland, said, "The oil markets are on holiday." He said recent market data showed a reduction in open interests, with the daily trading volume "down to rock bottom."

The Energy Information Administration reported inventories of benchmark US crudes increased for the first time in 6 weeks, up 800,000 bbl to 301.8 million bbl in the week ended June 20. The consensus on Wall Street was for another decline, with a 1.1 million bbl draw. Gasoline stocks dipped by 100,000 bbl to 208.8 million bbl during the same period, exactly as expected. Distillate fuel inventories increased 2.8 million bbl to 119.4 million bbl, exceeding Wall Street's call for a 1.8 million bbl build (OGJ Online, June 25, 2008).

Jakob said, "Middle distillate stocks have built by 10 million bbl over the last 4 weeks compared to being unchanged in the same period a year ago. Refiners are facing a reduction in demand (minus 680,000 b/d on the 4-week average; or 3.2%) and have product stocks in days of forward demand well within the range of previous year. Starting the hurricane season, there is no less stock cover than in previous years on products; the deficit is in crude oil stocks, but refiners know that the strategic petroleum reserve will be quickly released if needed on any storm disruption."

Analysts at Pritchard Capital Partners LLC, New Orleans, said, "There are once again significant worries about whether the US and other western countries are on the brink of recession. Financial markets are pointing toward a lower opening for equities, and high commodity prices are not necessarily viewed as a safe haven for money any more." They said, "Technicians largely believe that the remainder of June and all of July may be a torpid bull market rest stop before hurricane jitters and typical seasonal buying takes markets higher in the second half of the quarter."

Pritchard Capital analysts reported, "Yesterday was a rough day for spot products' markets, and it provided some breathing room for downstream marketers. But it also brought much more narrow refined products' margins, with gasoline output struggling to make break-even numbers in some areas, and diesel cracks constricting considerably. Gulf Coast gasoline is still talked around 13.75-14¢/gal off futures, which puts it only about $2.75/bbl above crude. Gulf Coast ultralow-sulfur diesel, once pegged some 20-30¢/gal over heating oil futures, has now witnessed that premium narrow to only about 0.5¢/gal." Moreover, they said, "The weakness spreads beyond petroleum. There are reports of substantial ethanol imports headed to US East Coast and Gulf Coast ports in the next 2 weeks. This could pressure ethanol values lower."

Oil and the economy
Crude prices will never hit $200/bbl as some market analysts have predicted "because the US economy would be broken before that happened," said Charles Biderman, chief executive of TrimTabs Investment Research Inc., an independent investment research firm in Sausalito, Calif., that provides trading strategies and investment insights to institutional investors.

"If oil prices hit $200/bbl, America's oil bill would be equal to a staggering 23% of the after-tax income of all Americans who pay taxes," Biderman said. When oil prices averaged $70/bbl in 2007, it cost US taxpayers just over $500 billion, or 8% of after-tax income. "At $135/bbl, America is already spending $1 trillion/year on oil, which is equal to 15% of after-tax income," said Biderman. "Such massive spending on oil alone is completely unsustainable."

Biderman urged the Commodity Futures Trading Commission to boost the margin requirements on oil futures to at least 25%. "The current margin requirements of no more than 7.5% must be increased to stem the speculation that has inflated oil prices," he said. "Stratospheric oil prices are destroying the US economy."

He disagreed with opponents' claims that high margin requirements would drive trading offshore. "What really worries officials of the New York Mercantile Exchange and the Intercontinental Exchange is that higher margin requirements would prick the oil bubble, reducing the huge revenue streams of their exchanges and traders," Biderman said.

Energy prices
The August contract for benchmark US light, sweet crudes traded at $131.95-$137.58/bbl June 25 before closing at $134.55/bbl, down $2.45 for the day on the on the New York Mercantile Exchange. The September contract dropped $2.44 to $135.08/bbl. On the US spot market, West Texas Intermediate at Cushing, Okla., was down $2.40 to $134/bbl. Heating oil for July delivery lost 6.44¢ to $3.75/gal on NYMEX. The July contract for reformulated blend stock for oxygenate blending (RBOB) declined 6.94¢ to $3.39/gal.

One day prior to its expiration, the July natural gas contract fell 25.8¢ to $12.75/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., was down 22.5¢ to $12.77/MMbtu. Pritchard Capital analysts said, "Mild weather and regulatory uncertainty were just two of the reasons circulating Wednesday to explain the 2-day combined decline of 45¢" for the front-month futures contract.

In London, the August IPE contract for North Sea Brent lost $2.13 to $134.33/bbl. The July contract for gas oil fell $33 to $1,206.25/tonne.

The average price for the Organization of Petroleum Exporting Countries' basket of 13 benchmark crudes lost $1.47 to $129.87/bbl on June 25.

Contact Sam Fletcher at samf@ogjonline.com

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