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MARKET WATCH: Gasoline draw pushes up oil prices

Sam Fletcher
Senior Writer

HOUSTON, July 31 -- Crude prices shot up July 30, wiping out losses from the July 29 trading session that had exceeded the July 28 rebound from the previous week's large declines.

More price flip-flops are likely. At the start of this week, the New York futures market's trading volume of benchmark US light, sweet crudes "was at a record low for the year, and the current low liquidity is making it hard to be fully confident about the sustainability of the rebound seen yesterday," said Olivier Jakob at Petromatrix, Zug, Switzerland.

Moreover, oil prices slipped lower in early trading July 31. At Pritchard Capital Partners LLC, New Orleans, analysts reported, "Market watchers said the downward drift was likely just retracement of yesterday's rally, with little news tied to the decline."

Although there has been no major disruption of crude supplies and demand in recent weeks, oil prices shot up July 30 after the Energy Information Administration reported the first decline in US gasoline inventories in 5 weeks, down 3.5 million bbl to 213.6 million bbl in the week ended July 25, vs. an expected increase of 100,000 bbl.

Commercial US crude inventories slipped 100,000 bbl to 295.2 million bbl in that same period, far short of Wall Street analysts' consensus of a 1.2 million bbl drop. Distillate fuel inventories increased 2.4 million bbl to 130.5 million bbl, exceeding the consensus for a 1.9 million bbl build (OGJ Online, July 30, 2008).

"The stock reduction in gasoline was larger than expected, but it needs to be put in perspective. The gasoline demand season is slowly coming to an end (vehicle miles drop seasonally in September), and with both absolute stock levels and days of cover clearly above recent years, refiners need to reduce stocks of gasoline," Jakob said. "For that reason, stocks of gasoline usually draw during the month of August, and based on normal patterns it should be expected to see further gasoline draws in the next 4 weeks."

Market influences
Jakob said, "We usually do not pay much attention to the jet kerosine number [in the EIA weekly report], but jet demand [for] the 4 weeks is down 5.2% from a year ago and at the lowest level for that time of the year since 1998. Airlines had been grounding some of their capacity to offset the price increase of jet fuel, and this is starting to show up in the demand numbers and provides a strong increase in the days of cover for jet fuel."

He noted the latest EIA report did not show any disruption of imports or Gulf of Mexico oil production as a result of Dolly, a category 2 hurricane that came ashore at South Padre Island, Tex., July 23. Any disruptions that may have occurred "will either show up next week in the statistics or more supply is actually starting to show up that it makes no weekly change on imports despite the disruptions," Jakob said.

Meanwhile, the "Geneva deadline" expires this weekend for Iran to comply with the United Nations' policy to prevent that country from making nuclear weapons. Ayatollah Ali Khamenei, Iran's supreme leader, has indicated there will be no compromise on that issue. This could result in international trade sanctions against Iran, including restriction of gasoline sales that "would shut an important outlet for European gasoline, which in turn would put more pressure on Atlantic Basin refining margins," Jakob said. "Iran has been recently importing higher levels of gasoline, officially to cover for upcoming refinery maintenance."

Pritchard Capital analysts said, "Word that Israeli Prime Minister Ehud Olmert was resigning amid corruption allegations and declining popularity was considered bullish to the oil market. There are worries about stability in the Middle East, particularly regarding tensions between Iran and Israel."

Energy prices
The September contract for benchmark US light, sweet crudes jumped $4.58 to $126.77/bbl July 30 on the New York Mercantile Exchange. The October contract climbed $4.46 to $127.20/bbl. On the US spot market, West Texas Intermediate at Cushing, Okla., was up $4.58 to $126.77/bbl. The August contract for reformulated blend stock for oxygenate blending (RBOB) escalated by 12.74¢ to $3.14/gal on NYMEX. Heating oil for the same month advanced 4.81¢ to $3.43/gal.

The new front-month September natural gas contract traded as low as $8.81/MMbtu, below the psychological $9 level, before rallying to close at $9.25/MMbtu, up 14¢ for the day on NYMEX. On the US spot market, gas at Henry Hub, La., dropped 14¢ to $9.02/MMbtu. Pritchard Capital analysts said, "Forecasting gas prices for the next few months can be tricky business, especially with summer heat and the 2008 Atlantic hurricane season still very much in play." However, the analysts said the natural gas industry "is heading into a period where the [gas] storage deficit to last year could collapse."

In London, the September IPE contract for North Sea Brent crude climbed $4.39 to $127.10/bbl. The August gas oil contract continued its retreat, however, down $6.75 to $1,131.75/tonne.

The average price for the Organization of Petroleum Exporting Countries' basket of 13 reference crudes lost 85¢ to $120.88/bbl Aug. 30.

Contact Sam Fletcher at samf@ogjonline.com.


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