MARKET WATCHSurprise inventory decline triggers rise in energy futures prices

July 1, 2004
Energy prices rebounded strongly Wednesday in New York and London markets after traders earlier guessed wrong on US inventories of crude and petroleum products.

Sam Fletcher
Senior Writer

HOUSTON, July 1 -- Energy prices rebounded strongly Wednesday in New York and London markets after traders earlier guessed wrong on US inventories of crude and petroleum products.

Prices had fallen in the three previous trading sessions, hitting an 11-week low Tuesday on the New York Mercantile Exchange as supply outages in Norway and Iraq were alleviated (OGJ Online, June 30, 2004). Traders were expecting a build of 1 million bbl in commercial crude inventories ahead of the Fourth of July holiday weekend in the US.

Instead, the US Energy Information Administration reported crude stocks fell by 500,000 bbl to 304.9 million bbl during the week ended June 25, despite a jump in crude imports to 10.6 million b/d, the fourth highest weekly average ever. US gasoline inventories were unchanged at 205.1 million bbl during the same period. Only distillate fuels increased, up by 500,000 bbl to 110.9 million bbl with a gain in heating oil more than compensating for a drop in diesel fuel, EIA said.

That report triggered an immediate escalation of crude futures prices, analysts said. They reported that markets also were spurred by remarks by Saudi Arabian Minister of Petroleum and Mineral Resources Ali al-Naimi that there is now "no justification" for the Organization of Petroleum Exporting Countries to decrease or increase production since oil prices have returned to a "fair" range of $30-34/bbl. That position apparently was endorsed in separate statements by the oil minister of Qatar and the oil advisor to the president of Nigeria.

That would seem to rule out a pending increase of 500,000 b/d in OPEC's production quota in August on top of a hike of 2 million b/d to 25.5 million b/d earlier this month. The group is scheduled to meet July 21 to review policy (OGJ Online, June 3, 2004).

Meanwhile, the American Automobile Association is forecasting record high travel in the US over the upcoming Fourth of July weekend. The number of motorists driving 50 miles or more over the holiday is expected to increase by 3.4% this year, with airplane travel projected to rise by 4.5%. AAA officials expect strong interest in travel to continue throughout the summer.

"Higher oil prices have not taken any appreciable bite out of US oil demand growth," said Paul Horsnell, head of energy research, Barclays Capital Inc., London.

Energy prices
The August and September contracts for benchmark US sweet, light crudes jumped by $1.39 each to $37.05/bbl and $37.14/bbl, respectively, Wednesday on NYMEX. On the US spot market, West Texas Intermediate at Cushing, Okla., gained $1.37 to $37.05/bbl.

Heating oil for July delivery shot up by 4.21¢ to $1.0055/gal Wednesday on NYMEX. Gasoline for the same month escalated by 3.19¢ to $1.1562/gal. It was the final trading day for those two contracts, which added to price volatility, analysts said.

The August natural gas contract climbed by 3.7¢ to $6.16/Mcf. "The [NYMEX natural gas] market is still close to testing long-term trend-line support at $5.98-6[/Mcf]. With near-term fundamentals looking fairly weak, the natural gas market was in danger of falling thorough the $6[/Mcf] level without the assistance of the broader energy complex" to pull it up, said analysts Thursday at Enerfax Daily. "Look for only limited upside with moderate weather, industrial plant shutdowns during the upcoming Independence Day holiday, and ample nuclear power generation," they advised.

In London, the August contract for North Sea Brent futures increased by $1.39 to $34.50/bbl on the International Petroleum Exchange. Gas oil for July delivery climbed by $10.50 to $321.75/tonne. The August natural gas contract gained 0.56¢ to the equivalent of $4.43/Mcf on the IPE.

The average price for OPEC's basket of seven benchmark crudes inched up by 18¢ to $32.68/bbl Wednesday.

Contact Sam Fletcher at [email protected]