MARKET WATCHCrude futures prices hit new highs

Aug. 25, 2005
Crude futures prices escalated to record highs Aug. 24 in the forefront of an approaching storm and worries about tight gasoline supplies.

Sam Fletcher
Senior Writer

HOUSTON, Aug. 25 -- Crude futures prices escalated to record highs Aug. 24 in the forefront of an approaching storm and worries about tight gasoline supplies.

Tropical Storm Katrina is expected to strike the coast of southeast Florida as a minimal Class 1 hurricane early on Aug. 26. The storm will likely miss most offshore oil and natural gas operations in the Gulf of Mexico and therefore is expected to do little damage in those waters. Still, the memory of earlier storms that have curtailed gulf production was enough to worry traders.

Markets also reacted to the Aug. 24 report by the Energy Information Administration that US gasoline inventories plunged by 3.2 million bbl to 194.9 million bbl, at the bottom of its average range during the week ended Aug. 19 (OGJ Online, Aug. 24, 2005). "Demand growth continues to be robust for gasoline," said analyst Paul Horsnell of Barclays Capital Inc. in London.

"There are two simultaneous, but different, processes of price formation at work in the oil market at the moment," Horsnell explained. "First, there is the gradual feeling out of the nature of the interaction between oil prices and the macroeconomy, which is an attempt by the price mechanism to rebuild a sufficient degree of slack along the supply chain." The other process, he said, is "more short term and dynamic and concerns the impact on prices of there being insufficient slack along the supply chain at the moment.

"In other words, the first process seeks to find a price that could offer a sustainable balance between supply and demand, while the second process prices in the additional degree of risk produced by a system with limited flexibility," Horsnell said. "The jury is still out as to whether higher prices are sustainable in terms of their macroeconomic impact, while there are some immediate issues, (eg, hurricanes, refinery outages, Iran, Iraq, etc) that could cause a further short-term move up."

Energy prices
The October contract for benchmark US sweet, light crudes escalated by $1.61 to a record-high closing of $67.32/bbl on the New York Mercantile Exchange, before bumping up to an all-time high of $68/bbl for a front-month contract in overnight trading. The November crude contract gained $1.53 to $68.01/bbl. On the US spot market, West Texas Intermediate advanced by $1.71 to $67.08/bbl. Gasoline for September delivery jumped by 6.78¢ to $1.93/gal on NYMEX. Heating oil for the same month increased by 4.6¢ to $1.87/gal.

The September natural gas contract soared by 30.1¢ to $9.98/MMbtu on NYMEX, "on a firm [spot] cash market, concerns about Tropical Storm Katrina entering the Gulf of Mexico, and a soaring crude oil market," said analysts at Enerfax Daily. EIA reported Aug. 25 a 60 bcf injection of natural gas into US underground storage during the week ended Aug. 19. That compared with injections of 52 bcf the previous week and 84 bcf during the same period a year ago. US gas storage now stands at more than 2.5 tcf, down by 27 bcf from a year ago but up by 136 bcf on a 5-year average.

In London, the October contract for North Sea Brent crude increased by $1.36 to $66.01/bbl on the International Petroleum Exchange. The September contract for gas oil gained $2.50 to $590.25/tonne.

The average price for the Organization of Petroleum Exporting Countries' basket of 11 benchmark crudes rose by 75¢ to $58.90/bbl on Aug. 24.

Contact Sam Fletcher at [email protected]