Sam Fletcher
OGJ Senior Writer
HOUSTON, Feb. 5 -- Oil futures prices rebounded Tuesday in anticipation that US. Secretary of State Colin Powell would present convincing evidence Wednesday to members of the United Nations that Iraq has stockpiled weapons of mass destruction.
That should help US officials overcome domestic and international opposition to military action against Iraq, traders said.
Meanwhile, the US Department of Energy reported early Wednesday that US commercial oil inventories increased by 1 million bbl to 274.3 million bbl last week, while total US distillate stocks plummeted by 10.3 million bbl to 112.1 million bbl. US inventories of gasoline fell by 3.4 million bbl to 209.6 million bbl.
But of top concern is that total US commercial inventories of crude and petroleum products are showing a rapid decline, noted Paul Horsnell, head of energy research for JP Morgan Chase & Co. in London.
Total US commercial inventories of crude and petroleum products fell by 15.5 million bbl in just 1 week to 65 million bbl below the 5-year average, down 98.7 million bbl from year-ago levels.
"Implosion" possible
"The US oil products system is on the verge of an implosion, and it will take quite some time to get things back to normal," Horsnell warned. "The pressure is almost entirely on oil products, which have gone from 5 million bbl below normal 3 weeks ago to now stand 30 million bbl below normal. It's not just the scale of the gap that is of concern, but the rapid momentum it has shown in opening up."
He said, "Distillates are under particular stress. Heating oil inventories are now lower than their usual end-of-season level, and normally they should continue falling until the end of March."
Based on DOE numbers, Horsnell said, "Implied oil demand for the (past) week was a massive 20.819 million b/d. Distillate demand ran at 4.926 million b/d in the week, the highest ever recorded."
In order to respond to that market demand, he said, "Production is going to have to swing back towards distillates, threatening to frustrate the necessary seasonal rise in gasoline inventories. The threat is then of a return to the cycle of dislocations in heating oil and gasoline that characterized the market from 1999 to 2001. All this from a base where futures prices for gasoline and heating oil are already above $40/bbl."
Meanwhile, Horsnell sees the possibility for more disruption of world oil supplies even as the US moves closer to a potential war with Iraq.
"The nightmare scenario is one where Venezuela's slow production ramp up is not complete, where there is a war in Iraq, and where something else goes wrong," he said. "Nigeria is high on the list of potential candidates for the position of 'something else.' (Tuesday's) rioting in the key oil city of Warri does not augur well for the future."
Futures prices
The March contract for benchmark US light, sweet crudes gained 82¢ to $33.58/bbl Tuesday on the New York Mercantile Exchange. The April position advanced by 75¢ to $32.91/bbl. Unleaded gasoline and heating oil for March delivery jumped by 4.38¢ each to $1.0006/gal for gasoline and 96.19¢/gal for heating oil.
However, the March natural gas contract dipped by 0.4¢ to $5.76/Mcf, after posting a contract high of $5.88/Mcf during trade Tuesday on NYMEX.
The market "rose early in very volatile trading as it followed (the) cash (market) higher but dipped suddenly just before noon on limited profit-taking," reported analysts at Enerfax Daily. "It traded near 2-year highs, supported by a soaring cash market and near-term cold weather as the bullish tone of the market remains in place. Without any precipitous sell-down recently, it reinforces the bulls thinking they can continue to buy high-end numbers."
Gas demand grows
Enerfax analysts anticipate "some more profit-taking in the natural gas market," ahead of an anticipated report Thursday by the US Energy Information Administration of another large withdrawal of gas from US underground storage in response to low temperatures last week.
"Inventories are getting relatively low as the sustained cold weather is diminishing storage. Some utilities are worried they may not have enough gas and are adding on spot supply," they said.
Robert Morris with Salomon Smith Barney Inc., New York, reported Wednesday that, "Composite spot natural gas prices surged to their highest level in almost 2 years in January as some of the coldest weather since 2000 enveloped much of the country."
Consequently, the November through January period was nearly 5% colder than normal, he said.
As a result, if weighted heating degree days for the rest of February and March "just match the 10-year average," he said, "then the full (2002-03) winter will end up being just over 3% colder than normal."
Morris said, "Thus, it would appear at this juncture that, if anything, our official $4.10/MMbtu composite spot natural gas price forecast for the full year could prove conservative."
That's "particularly true," he said, if the average price of oil fails to drop to around $20/bbl in the second half of 2003 to encourage a switch from natural gas to residual oil for fuel. At this point, he said, only 2 bcfd of natural gas demand has been lost to fuel switching, out of a potential 4 bcfd.
On the other hand, Horsnell claimed, "With natural gas prices looking ominously strong, the possibility remains that fuel substitution could help prop distillate demand up further, even as the cold weather effect falls way."
He said, "In total, the supply side is struggling, the US refinery system is under severe stress, and demand is posting some impressive numbers. If you happen to be a US oil refiner with the luck of having spare crude to run and a refinery that is not in maintenance, then you are probably grinning from ear to ear. Oil product prices are moving up very rapidly relative to crude oil."
London market
In London, the March contract for North Sea Brent oil jumped by 84¢ to $31.09/bbl Tuesday on the International Petroleum Exchange. The March natural gas contract inched up 2.02¢ to the equivalent of $2.80/Mcf on IPE.
The average price for the Organization of Petroleum Exporting Countries' basket of seven benchmark crudes lost 31¢ to $29.98/bbl Tuesday.
Contact Sam Fletcher at [email protected]
