Sam Fletcher
Senior Writer
HOUSTON, Nov. 6 -- Energy prices soared Wednesday as traders were surprised by reports of lower-than-expected US inventories of oil and petroleum products.
The American Petroleum Institute said Wednesday that US crude inventories fell by 1.4 million bbl to 292.2 million bbl in the week ended Oct. 31. It reported a small increase in distillate stocks of 220,000 bbl to 128.8 million bbl but said US gasoline stocks fell by 1.8 million bbl to 192.6 million bbl in that period. API's tally conflicted with an earlier report by the US Energy Information Administration of US inventories for the same period, but such differences are not unusual.
EIA said US oil stocks rose a scant 100,000 bbl to 291.9 million bbl last week, despite the highest weekly average oil imports ever for October (OGJ Online, Oct. 5, 2003). US oil inventories remain 11.2 million bbl below the 5-year average for this period, officials said.
Moreover, EIA recorded the first decline in US distillate stocks in recent weeks, down by 1.3 million bbl to 132.7 million bbl, with a drop in heating oil outstripping a slight gain in diesel fuel. US gasoline inventories fell by 2.5 million bbl to 191.3 million bbl in the same period, it said.
The inventory reports were only mildly bullish, said analysts, but triggered some fast-paced buying among commodity traders who were expecting a continuation of the recently bearish build in energy stocks. Some traders said the rise in crude prices Wednesday probably was overdone, since the bulk of decline was in product inventories. They predicted crude prices would soon correct to lower levels as traders take profits from Wednesday's rally.
'Buoyant demand'
However, Paul Horsnell, head of energy research at Barclays Capital Research, a division of Barclays Bank PLC, London, maintains that the supply-demand fundamentals of petroleum products are now leading world oil markets. "The pattern so far is of pretty buoyant demand. [US] gasoline demand passed through 9 million b/d in October for the first time ever and shows an enormous 348,000 b/d growth from last year," he said.
US demand for gasoline averaged nearly 9.2 million b/d over 4 weeks through Oct. 31, up 3.9% from the same period last year, EIA reported. Demand for distillate fuels dipped by 0.4% in the same period.
US stocks of reformulated gasoline are "particularly tight" at present, said Horsnell. "Reformulated gasoline inventories have fallen to their lowest level since November 1994," he said. "To put that into context, there was no reformulated gasoline in the US until September 1994, except in test tubes. In that respect, reformulated [gasoline] inventories are effectively at an historic minimum."
Horsnell said, "Unless the tightness in gasoline abates fairly quickly, it is perhaps not too early to start worrying about another summer of discontent in the market. As we have seen before, when the schedule for seasonal gasoline restocking gets behind, it has proved very difficult for the physical system to catch up in time."
Meanwhile, he said, US heating oil inventories "at last" have started a seasonal downturn. "The situation can best be described as following a normal pattern from a lower-than-normal base," Horsnell said. "The important feature of distillate demand is how high the January and February peaks get. All we can say at this point is demand is currently climbing the foothills in exactly the same way as last year, and at this point we do not feel that anyone can yet be dogmatic that last year's high summit will not be regained."
Energy prices
The December contract for benchmark US light, sweet crudes closed at $30.30/bbl Wednesday on the New York Mercantile Exchange, up by $1.55 for the day after touching a peak of $30.38/bbl in that session—a level not seen on NYMEX since Sept. 24. The January contract gained $1.50 to $30.13/bbl. On the US spot market, West Texas Intermediate at Cushing, Okla., jumped by $1.55 to $30.33/bbl.
Heating oil for December delivery shot up by 4.77¢ to 82.63¢/gal on NYMEX. Unleaded gasoline for the same month jumped by 3.99¢ to 82.39¢/gal.
The December natural gas contract on NYMEX escalated by 17¢ to $4.90/Mcf, lifted by the rise in oil prices and the strengthening gas spot market "as cold weather moved into the Midwest and headed east, raising expectations for more demand this week," said analysts Thursday at Enerfax Daily.
"Cash prices increased sharply as utilities and storage operators, looking to conserve inventory early in the heating season, turned to the cash [natural gas spot market] to meet the expected jump in heating demand this week," said Enerfax analysts. "But despite the weather-related rally, most traders expected the bulls to remain cautious without sustained arctic air to drive demand, noting [US underground gas] storage was near capacity and fourth quarter natural gas production is on the rise."
Early Thursday, EIA reported 34 bcf of natural gas were injected into US underground storage during the week ended Oct. 31. That injection number was below the general consensus of Wall Street analysts but increased US gas storage to nearly 3.16 tcf at the start of the winter demand season, 95 bcf above the 5-year average for that period. That marks the first time that current gas inventories have exceeded comparable year-ago figures since October 2002, Enerfax analysts said.
"Including [the latest] reported results, injections are averaging almost 38% above the 5-year average this injection season, which, if extrapolated, would imply storage reaching 3.18 tcf next week," said James K. Wicklund, an analyst in the Houston office of Banc of America Securities LLC, New York.
In London, the December contract for North Sea Brent oil bumped up by $1.44 to $28.60/bbl Wednesday on the International Petroleum Exchange. Gas oil for November delivery jumped by $13.50 to $259.75/tonne. And the December natural gas contract shot up by 30¢ to the equivalent of a whopping $6.07/Mcf on IPE.
"UK natural gas prices recovered from weakness at the end of last week and have set new all-time highs this week," Horsnell said. "The [UK gas] market remains very nervous about the prospect for the system to become extremely stretched over the winter, and those worries have been enhanced by a series of recent field and pipeline glitches," he said.
The average price for the Organization of Petroleum Exporting Countries' basket of seven benchmark crudes gained 72¢ to $27.49/bbl Wednesday.
Iraq's production questioned
Horsnell suspects "a little creative accounting" in recent claims by both Iraqi and US officials that Iraq has increased production to more than 2 million b/d and "will continue to rise remorselessly from now on."
He said, "It does appear to be true that 2 million b/d [of Iraqi crude] is being brought above ground. The very slight problem is that it is not all staying above ground, and, outside of Iraq, keeping the oil above ground is generally considered to be the major aim of the operation."
Horsnell noted that exports of Iraqi crude averaged 1.2 million b/d during October, while Iraqi refineries processed some 450,000 b/d for domestic use. "The remaining flow of over 300,000 b/d was brought up through northern wells and then immediately reinjected due to the lack of any viable export route, give the sabotage of pipelines," he said.
Iraq's "useful" oil production is likely about 1.7 million b/d, said Horsnell. And he questions if the country's sustainable production capacity is much higher, considering how it has fallen in recent years, during the United Nations' ban on trade with Iraq, including oil field equipment and services.
"In October 2000, Iraq produced 3.1 million b/d. In October 2001, output reached 2.8 million b/d, a level that was never regained in the period before the war started. By October 2002, production was 2.5 million b/d," Horsnell recounted.
"We do wonder precisely how much damage was done to the oil fields through neglect before the war and how high the rate of capacity-decline reached," he said. "We doubt that Kirkuk [Iraq's second largest oil field] can ever be the same field it was even a few years ago."
Horsnell said, "Wherever [Iraq's] true sustainable capacity for 2004 lies, it will certainly be a considerable distance from the 3.1 million b/d produced as recently as 3 years ago. That level now looks like a high-water mark, which Iraq is currently a massive 1.4 million b/d below. It may struggle to get within 700,000 b/d of that mark for a while to come."
Contact Sam Fletcher at [email protected]
