Sam Fletcher
Senior Writer
HOUSTON, Mar. 6 -- An unexpected drop in US crude inventories caused the front-month crude contract to jump $5 to new highs above $104/bbl Mar. 5 on the New York market, although many of the industry's biggest participants and closest observers report no changes in supply and demand fundaments to justify that fly-up.
ExxonMobil Corp. Chief Executive Officer Rex Tillerson told reporters Mar. 5 in New York that the weak US dollar, geopolitical uncertainties, and speculation were equally responsible for the recent run up in energy prices. Earlier that day in Vienna, ministers of the Organization of Petroleum Exporting Countries cited essentially the same market forces and reiterated that the world oil market currently is well-supplied with commercial oil stocks above the 5-year average.
"The energy markets have been on a tear as both crude and natural gas prices continue to move higher," said analysts in the Houston office of Raymond James & Associates Inc. The latest spike in crude prices "was driven by a very bullish inventory report while strong technicals coupled with cold weather continue to push natural gas prices higher. We don't expect prices for either to hold at these levels over the next few months and view this as more of a short term run," they said.
The Energy Information Administration reported crude inventories fell 3.1 million bbl to 305.4 million bbl in the week ended Feb. 29, vs. Wall Street expectations of a 2.1 million bbl build. US gasoline stocks escalated 1.7 million bbl to 234.3 million bbl in the same period, outstripping financial analysts' consensus of a 500,000 bbl gain. Distillate fuel inventories for the same week decreased by 2.4 million bbl to 117.6 million bbl, vs. consensus of a drop of 1.9 million bbl.
"The fundamentals are still miles away from providing a clear justification for the current price level," said Olivier Jakob at Petromatrix, Zug, Switzerland. He noted that oil imports into the US "were suffering from fog delays" during the reported period and that 2.4 million bbl of the 3.1 million bbl crude draw occurred in the isolated Petroleum Administration for Defense District (PADD) 5, including the West Coast, Alaska, and Hawaii, "which in normal days would be discounted." Jakob said, "In the end the most supportive element we find in the statistics is the draw of 800,000 bbl [from crude storage in Cushing, Okla.,] which could be pushing some short covering on bear spreads. The West Texas Intermediate [price] premium to [North Sea] Brent is, however, widening and on the continuation of that trend will need to be monitored for delivery arbitrage."
Jakob said, "The argument used to be that oil prices will rise until a top is defined by demand destruction. The [EIA] statistics are now showing US demand for the 4-week average down 1.1 million b/d from last year. Emerging countries running on state subsidies can still have some growth, but it will not translate in much oil demand growth on a worldwide basis. Given, some of the fall in US oil demand is coming more from the industrial sector (fuel and 'other' oils), the demand for the main clean products (middle distillates, kerosine, gasoline) is still down 400,000 b/d for the 4-week yearly comparison."
Furthermore, Jakob said, "The dollar might be weak, but buying oil for the dollar trade is getting so amplified that even on a dollar-adjusted basis, oil is [at a] record high, which is of no relief to the nondollar consumer. WTI has gained 21% in 1 month and newcomers on the long side [of the crude futures market] need to believe that further gains are possible. Paradoxically, it is the fact that there is no compelling fundamental story that is making a further rise possible, as then $105/bbl is just a number that could as well be $120/bbl."
He said, "OPEC has proven again that the days when it was a market maker are definitely over. The oil market is about financial flows, not oil flows. The only way for OPEC to regain its previous status would be to wake up today's world and start using Futures to hedge its production."
Paul Horsnell at Barclays Capital Inc., London, said one "striking feature" of the current market is the strength of distillates relative to gasoline. Over the past 2 weeks, the April contract for reformulated blend stock for oxygenate blending (RBOB) "has fallen by a remarkable $10.62/bbl relative to April heating oil," Horsnell said. "Over those 2 weeks, the April RBOB gasoline crack has lost 56% of its value in falling by $8.42/bbl. By contrast, over the same period the April heating oil crack has risen by $2.20/bbl."
Gasoline vs. diesel
Horsnell noted: "In terms of retail prices, the latest reading puts the US national average for diesel at a new all-time high of $3.658/gal, 22¢ higher than the previous peak reached last November. By contrast, while gasoline [retail] prices are historically high at an average of $3.162/gal for regular unleaded, they are still 5¢ below the peak reached last May. Since the start of the year, retail gasoline prices have risen by 10.9¢/gal, while retail diesel has risen by 31.3¢/gal. The major impact this year does then seem to have been on industrial and distribution transport costs, a factor which either plays out as lower profit margins or in the transmission of higher costs through to retail prices. In other words, so far this year, the consumer has not been the central focus for gauging the full effects of oil price increases. Relative to previous price surges, those effects are so far apparently playing out more significantly through costs rather than reduced consumer discretionary income."
Eitan Bernstein of Friedman, Billings, Ramsey & Co. Inc., Arlington, Va., reported, "Gasoline stocks are now 8% above comparable year-ago levels, which materially reduces supply concerns heading into summer (peak demand) driving season and results in lower gasoline prices and refining margins. US gasoline inventories should begin declining within the next few weeks, which should be positive for refining margins and stocks. However, the current situation certainly supports our view that 2008 US refining margins will average 20% below last year's record highs."
Energy prices
The April contract for benchmark US sweet, light crudes hit a record intraday high of $104.95/bbl Mar. 5 on the New York Mercantile Exchange before closing at a record $104.52/bbl, up $5 for the day. The May contract jumped by $4.72 to $103.69/bbl. On the US spot market, WTI at Cushing matched the front-month NYMEX price, up $5 to $104.52/bbl. The April RBOB contract increased 11.3¢ to $2.64/gal. Heating oil for the same month climbed 15.13¢ to $2.94/gal.
The April natural gas contract escalated by 38.8¢ to $9.74/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., gained 21.5¢ to $9.41/MMbtu. EIA reported the withdrawal of 135 bcf of natural gas from US underground storage during the week ended Feb. 29. The remaining gas in storage now stands at 1.48 tcf, down 169 bcf from the same time a year ago but 63 bcf above the 5-year average.
In London, the April IPE contract for North Sea Brent crude jumped by $4.12 to $101.64/bbl, a record high for that market. The March gas oil contract soared with an impressive gain of $43.25 to $957.50/tonne.
The average price for OPEC's basket of 12 reference crudes dropped 34¢ to $95.95/bbl on Mar. 5.
Contact Sam Fletcher at [email protected].
