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July was bad for oil

Sam Fletcher
Senior Writer

US crude dropped $15.92/bbl in July for the biggest dollar loss in a single month since it began trading on the New York Mercantile Exchange. On July 31, benchmark US light, sweet crudes fell more then 2% to $124.08/bbl, marking "the worst month for oil (in percentage terms) since December 2004, though oil is still up 29% year-to-date," said analysts in the Houston office of Raymond James & Associates Inc.

"US gasoline demand is down an alarming 3.5% this year, though the global demand picture still looks brighter," said Raymond James analysts. However, Paul Horsnell, Barclays Capital Inc., London, said the oil market has been "behaving fairly rationally and efficiently" in recent months. "Having first gone through something of a short-run overshooting of prices in the wake of supportive news flow and some temporary market dynamics, an efficient correction has been made. The move back down in prices has been orderly, not a bubble bursting, and is a gentle adjustment back to a price range whose potential long-term equilibrium has not really been subject to much in the way of investigation and testing."

Horsnell expects volatile oil prices through August due to geopolitical and economic pressures. Crude rebounded Aug. 1 after Israeli Deputy Prime Minister Shaul Mofaz said Iran may be nearing a breakthrough in its nuclear program, fanning fears of a preemptive strike by US or Israeli forces. Iran did not respond to the Aug. 2 United Nations deadline to halt its nuclear program.

Prices will likely fluctuate in a fairly wide range before escalating again in coming months but are not likely to fall to a far lower trading range. "A large part of the reason for that is the global market balances. The demand side of the market does not seem to be quite as soft at the global level in reality as it currently is in market sentiment," Horsnell said

He sees temporary "demand reaction" to current high energy prices rather than the extensive demand destruction of the 1970s. Meanwhile, he said, "Non-OPEC supply is still the mouse that does not roar, and its trajectory is still disappointing relative to consensus expectations. Indeed, further down the line, we are increasingly coming to the conclusion that the potential pace of decline of non-OPEC supply after 2010 is likely to become a matter of some concern for the market."

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. "The gasoline demand season is slowly coming to an end (vehicle miles drop seasonally in September)," said Olivier Jakob at Petromatrix, Zug, Switzerland. "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."

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."

Asian demand
For the first time this year, imports of crude into "the four main Asian countries"—China, Japan, India, and South Korea—were lower in June than for the same period a year ago, Japan's imports were reduced because of refinery maintenance and declining demand for petroleum products. Japanese domestic sales were down 5.5% from a year ago, including an 8.9% drop in gasoline sales. "Crude oil imports were still higher from a year ago in emerging Asia and for the first half of the year are in line with the increased refinery run levels," Jakob said. "India's oil product sales in June were officially reported up only 0.4% vs. a year ago, which is a first warning sign." He said, "The big question mark for the global supply and demand remains the levels of Chinese product imports once the closing ceremony of the Olympic Games is over."

Jakob said, "Asian-4 refinery runs increased during June mainly due to an increase from China more than offsetting a drop in Japan and South Korea. Chinese imports of diesel reached a record high on Olympic stock-building while net imports of fuel were cut in half from May."

(Online Aug. 4, 2008; author's e-mail: samf@ogjonline.com)


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