Crude futures prices climbed above $62/bbl in early trading on the New York market following the death of Saudi Arabia’s King Fahd bin Abdul Aziz on Aug. 1. However, the escalation was checked by confidence that the new king, former Crown Prince Abdullah bin Abdulaziz al-Saud, would maintain Saudi Arabia’s current policy of supplying world markets. Abdulla, Fahd’s half-brother, had been de facto ruler of Saudi Arabia since Fahd suffered a stroke in 1995.
Observers reported loading operations at Saudi Arabian oil terminals continued as normal, apparently unaffected by Fahd’s death.
Iraq outlook
Meanwhile, based on estimates by the Middle East Economic Survey, “Iraqi output has remained below 2 million b/d for 8 straight months, after having reached the 2004 peak of 2.4 million b/d in October,” said Paul Horsnell of Barclays Capital Inc., London, in a July 27 report.
He noted, “The last time that Iraq averaged 3 million b/d was August 2000. The level of production in June this year was 1.82 million b/d, and the average for the second quarter was 1.863 million b/d, which represents no progress at all on the 1.898 million b/d average recorded in the first quarter and the 1.885 million b/d average of fourth quarter 2004.”
Moreover, Horsnell said, “It does not appear to us that [Iraq’s] political center has yet come close to being solidified and focused enough to disburse funds effectively through the oil sector. Given that there is no obvious timeline towards an end to that stasis, the short and medium-term prospects for Iraqi output appear to us to be very downbeat indeed.”
Energy prices
Energy prices climbed July 28-29, up $1.46 over the 2 days to $60.57/bbl, as a result of refinery mishaps. Murphy Oil Corp. shut down a diesel hydrotreater following a fire July 28 at its 120,000 b/d Meraux, La., refinery. That was followed by an explosion and fire involving a hydrotreater at BP PLC’s 446,500 b/d Texas City plant (OGJ Online, July 29, 2005).
Meanwhile, recent high margins led refiners to maximize distillate production, said Jacques Rousseau and Eitan Bernstein of Friedman, Billings, Ramsey & Co. Inc., in a July 27 report. Only weeks before the Sept. 5 end of the US summer driving season, they said, “We believe that gasoline supplies (currently 1% ahead of year-ago levels) should be adequate. With margins still about 50% above midcycle, we expect production to ramp up and refined product inventory levels to rise in the coming weeks. It is important to remember that, absent hurricanes, September has historically been one of the worst months for refining sector fundamentals due to slowing demand and rising inventories. We expect the net result to be falling refining margins.”
The Energy Information Administration said commercial US crude inventories plunged by 2.3 million bbl to 317.8 million bbl during the week ended July 22. Gasoline inventories dropped by 2.1 million bbl to 209.2 million bbl during the same period, but distillate fuel stocks escalated by 3.1 million bbl to 125.8 million bbl.
Total demand rose by 400,000 b/d, with gains in gasoline, residual fuel, and heating oil demand being partially offset by declines in diesel and jet fuel demand. “Year to date, total demand has averaged 3.2% more than the 2004 comparable period. Gasoline demand has averaged 2.0% more than year-ago levels, but growth rates have slowed in recent weeks, with last week’s data showing a 1% decline versus the same calendar week of 2004,” said Rousseau and Bernstein.
However, Horsenell said, recent price spreads between September gasoline and September heating oil “of a little over $1/bbl appear to us to be at least $5 too low.”
He said, “US oil product inventories are now 4.3% lower than their 5-year average in terms of days of forward cover, with gasoline cover 4.5% below the 5-year average. Crude oil inventories are expected to fall further, with imports remaining subdued while refinery runs move back up.” Horsnell predicted, “The pieces are now falling into place for another move above $60 in crude oil prices, and the setting of a new set of all-time highs. In terms of trading strategy, we would therefore retain a bullish stance in terms of the short-term direction of crude oil prices, and we continue to believe that distillate cracks are overvalued relative to gasoline cracks.”
The latest EIA data continued to be “supportive for prices, with an overall tightening at the top level, and then within that an extension of the relative fundamental strength of gasoline compared to distillates,” Horsnell said.
(Online Aug. 1, 2005; author’s e-mail: [email protected])
