Sam Fletcher
Senior Writer
HOUSTON, Mar. 23 -- Led by the gasoline market, crude and refined product prices fell Mar. 22 despite a government report of unexpectedly lower US inventories.
The Energy Information Administration reported a 1.3 million bbl drop in commercial US crude inventories to 338.6 million bbl during the week ended Mar. 17. US gasoline stocks fell by 2.3 million bbl to 221.6 million bbl, while distillate fuel declined by 800,000 bbl to 126.7 million bbl during the same period, with slight declines in both heating oil and diesel fuel (OGJ Online, Mar. 21, 2006).
Traders apparently are confident that more fuel is on the way to market as refining activity increases. "With the summer driving season quickly approaching, [the] larger-than-expected decline in gasoline inventories should be positive for refining margins," said Jacques Rousseau at Friedman, Billings, Ramsey & Co. Inc., Arlington, Va.
Market outlooks
"The industry average utilization rate rose from 85.7% to 86.7% but remains below historical averages," Rousseau said in a Mar. 22 refining report. He noted that the unplanned shutdown of Hovenza's 150,000 b/d gasoline processing unit at St. Croix had lowered US gasoline imports. The unit is expected to restart soon.
However, Paul Horsnell of Barclays Capital Inc., London, said: "The momentum went out of the rise in inventories relative to normal levels 4 weeks ago, and in the latest week they fell by 4 million bbl relative to the normal seasonal pattern, with all of that fall being in crude oil. Imports of crude fell to just 9.331 million b/d, the lowest weekly level since the hurricane-affected weeks of mid-October."
Horsnell said, "Demand indications have remained strong for gasoline, with the latest weekly level of implied demand coming in at 9.1 million b/d. That is the third week in a row above 9 million b/d and keeps the [annual] growth for March-to-date at a robust 1.1%."
Crude futures prices remain solidly above $60/bbl because of persistent concerns over supply disruptions in Nigeria and a potential confrontation of Iran by the United Nations Security Council. Since last week, the five permanent members of the Security Council have been debating what action to take against Iran to force it to forgo its nuclear power program, which some fear is a front for the development of nuclear weapons.
"Iraq is now significantly closer to disintegration as an integral state than it was 9 months ago, and Iran is much closer to both external confrontation and to regional political leadership," Horsnell said.
However, Iranian President Mahmoud Ahmadinejad's threats to withhold oil exports if trade sanctions are imposed against it by the US or UN "may be largely rhetorical" because of other key decision-makers' concerns about the negative impact on Iran's own economy and security, said Alan Hegburg, a Senior Fellow in the Energy Program at the Center for Strategic and International Studies in Washington, DC. He spoke in a recent conference call sponsored by Friedman, Billings, Ramsey & Co.
Hegburg said that, despite the punitive tenor of the sanctions package passed by the House International Relations Committee, UN members have few incentives to embargo purchases of Iranian oil or sales of gasoline to Iran.
Energy Security Analysis Inc. of Boston said the spread between West Texas Intermediate and North Sea Brent crudes "has come down considerably" from its peak near $3.75/bbl October but will likely widen with the US driving season.
"In the wake of the Gulf of Mexico production outages last fall, the Western call on crude rose by nearly 1 million b/d," says Rick Mueller, senior analyst at ESAI. "But as production in the gulf recovered and US [refinery] runs dipped for deferred maintenance, the Western call on crude has fallen by nearly 2 million b/d, contracting the WTI-Brent spread to current levels."
ESAI said the US driving season should see the call on crude rise, just as Eastern Atlantic imports begin sliding. "Beyond these crude fundamentals, the upcoming gasoline season promises to be a particularly strong one," said Mueller. ESAI said market concerns over the shift away from methyl tertiary butyl ether to ethanol and about ethanol sources, as well as the growing reliance on imports, should keep gasoline crack spreads, which gauge value differences between crude and products based on refining yields, above $10/bbl this summer. "As a result, WTI-Brent spreads should rebound in April," said Mueller.
Gulf conditions
The US Minerals Management Service said 87 offshore platforms in the Gulf of Mexico remained evacuated Mar. 22 because of damage inflicted last year by Hurricanes Katrina and Rita. Officials said 343,172 b/d, or 22.9%, of crude production from the gulf remain shut in, as is 1.4 bcfd, or 13.9%, of gulf natural gas production.
Cumulative production lost since Aug. 26 through Mar. 22 totaled 139.4 million bbl of crude and 692.3 bcf of gas. That's equivalent to 25.5% of the oil and 19% of the gas produced annually from federal leases in the gulf.
Meanwhile, Horsnell said, "Early and tentative indications seem to imply the 2006 Atlantic hurricane season also may be more active than normal," as it was in 2005.
He said, "It is still just a little too early to factor in the 2006 Atlantic Hurricane season into the market, although we would note that orange juice, the most hurricane-sensitive commodity of all, is currently trading at a 14-year high."
Energy prices
The new front-month May contract for benchmark US sweet, light crudes lost 57¢ to $61.77/bbl Mar. 22 on the New York Mercantile Exchange. The June contract fell 61¢ to $63/bbl. The spot price for West Texas intermediate crude at Cushing, Okla., gained 20¢ to $60.78/bbl. Gasoline for April delivery plunged by 10.3¢ to $1.74/gal. Heating oil for the same month retreated by 2.71¢ to $1.75/gal.
However, the April natural gas contract climbed by 8.5¢ to $6.95/MMbtu despite expectations of another boost in already record-high US storage levels. On Mar. 23, EIA reported the withdrawal of 23 bcf of gas from underground storage in the week ended Mar. 17. That was below the consensus of Wall Street analysts and compared with withdrawals of 55 bcf the previous week and of 89 bcf during the same period a year ago. That put US gas storage at 1.8 tcf, up by 506 bcf from a year ago and 724 bcf above the 5-year average.
In London, the May IPE contract for North Sea Brent crude lost 63¢ to $61.50/bbl. The April gas oil contract, however, recovered $11.25 to $558.25/tonne.
The average price for the Organization of Petroleum Exporting Countries' basket of 11 benchmark crudes gained 56¢ to $56.70/bbl on Mar. 22.
Contact Sam Fletcher at [email protected].
