Most analysts now see the world market for crude and petroleum products continuing to tighten through the rest of this year, pushing prices higher.
“It is a self-evident fact that the current state of the commodity markets provides a positive operating environment for the entire energy complex,” said Wayne Andrews in the Houston office of Raymond James & Associates Inc. “Our 2007 forecast is $64.11/bbl for crude oil and $7.56/Mcf for natural gas. We have an even more bullish long-term price deck-$70/bbl oil and $10/Mcf gas-with a 2% price inflator after 2008.” He said, “We continue to believe in the long-term sustainability of historically robust oil and gas prices.” Analysts at Barclays Capital Research in London see crude prices averaging $10/bbl higher during the second half of 2007 than in the first half.
On Apr. 27, the June contract for benchmark US crudes rebounded $1.40 to $66.46/bbl, the highest closing in almost a month on the New York Mercantile Exchange, after Saudi Arabian authorities arrested 172 Islamic militants accused of plotting attacks on oil installations. The May contract for reformulated blendstock for oxygenate blending (RBOB) escalated by 7.1¢, or 3.1%, to $2.36/gal, its highest level since early August.
Société Générale Group analysts foresee “a supply-driven market for the next 2 months.” There recently has been “not a single day without news of a US refinery experiencing unexpected problems,” they said. “The Europe-to-US gasoline arbitrage has reopened but is not as profitable as [recent New York market prices] would suggest. The market is convinced US gasoline stocks won’t build for the next 3 weeks,” they said. “Crude supply does not appear as an issue as long as US refinery runs stay low. The market is expecting Nigeria production to increase with the ‘imminent’ return of Forcados” oil field to production.
‘Explosive start’
This year started with many analysts anticipating relatively hard landings for the US and Chinese economies. Others expected sharp acceleration of supply growth among crude producers outside the Organization of Petroleum Exporting Countries.
“Indeed, price behavior at the very start of the year seemed initially to signal a sharp discontinuity, with prices falling by more than $12/bbl over just the first 12 trading days of the year,” said Barclays Capital analysts. “After that explosive start, most crude and oil product prices have first recovered their early losses and then moved higher as a somewhat less exciting truth has been revealed. In short, the general trends in 2007 are very much a continuation of the patterns of 2005 and 2006.”
Demand has increased, while non-OPEC supply “is still struggling to find second gear rather than racing on ahead,” Barclays Capital analysts reported. “The existing logistical distortions within the supply chain are still there and have generally become worse, while some other market distortions have become significant. The exposure to potential shocks remains acute, and weather conditions alone are continuing to create an enhanced level of price volatility. Furthermore, even under conditions of extreme downwards pressure at the front of the curve in early January, we detected no significant shift in a general market perception of stronger prices going forward. Indeed, the lowest settlement for the back end of the [NYMEX]-traded [benchmark US crudes] curve this year has been $59.67/bbl, after which, back-end prices moved fairly remorselessly back into the upper $60s.”
So far this year, wholesale gasoline prices have been more volatile than crude prices, with gasoline crack spreads moving through wide arcs and at several points reaching levels above $25/bbl at the front of the curve as absolute futures market RBOB gasoline prices pushed on beyond $90/bbl, said Barclays Capital analysts. Moreover, benchmark US crude prices have dislocated away from both cash markets in the main US regions and other crude oil futures indicators. At the extremes, the US benchmark crude has traded at unprecedented levels of more than $5/bbl below Brent at the front of the curve and is currently projected by Barclays Capital to average less than front-month Brent across the year as a whole for the first time ever.
Because US crude is “pipeline-based,” it has always been affected by logistical dislocations in the Midwest, particularly at its Cushing pricing point. “When those dislocations bite, then [benchmark US crude] can dislocate away from indicators of broader global market conditions,” said Barclays analysts.
“Tightness and lack of flexibility have continued upstream, downstream, and midstream and the bottlenecks and lack of availabilities in the markets for skilled and experienced labor and key items of capital equipment have remained entrenched,” they said.
(Online Apr. 30, 2007; author’s e-mail: [email protected])
