Market watch: Oil prices mixed ahead of reported inventory increase

By OGJ editors

HOUSTON, Aug. 21 -- Energy futures prices were mixed during trading Tuesday, ahead of an American Petroleum Institute report of a large jump in US oil and gasoline inventories last week instead of another decline as expected by traders.

US oil inventories shot up by 6.6 million bbl to a total of 302.3 million bbl last week, reversing more than two thirds of the 9.5 million bbl draw reported by API the previous week. US gasoline stocks also jumped by 935,000 bbl to 209.9 million bbl, while distillates registered a relatively small decline of 282,000 bbl, with 132.7 million bbl still in inventory.

"After the (previous) sharp and inconsistent decline in crude inventories. . .and despite API denials over a pipeline transfer error, this week's API (report) future highlighted the extent of timing impacts on inventory reporting and data volatility," said Matthew Warburton, an analyst at UBS Warburg LLC in New York. "Nonetheless, with global crude inventories on a gradual tightening trend and uncertainty surrounding potential US military action in Iraq, we expect any bearish reaction to the crude build to be muted."

US crude and petroleum product inventories "remain comfortably in the middle of the 5-year (average) range," said Warburton.

However, he said, "With total crude inventories. . .still close to their 12-month lows and the ongoing tightness in (Petroleum Administration for Defense District 2, encompassing the upper Midwest US), we expect West Texas Intermediate prices to remain firmly backwardated with incremental crude imports drawn into the US."

Warburton also noted, "Counter to market expectations, gasoline inventories increased slightly as domestic production climbed to near-record levels of 8.8 million b/d and imports rebounded. Barring unforeseen outages, in the coming weeks we do not expect a repeat of the sharp draw in gasoline stocks witnessed this time last year.

"Nonetheless, with economic runs cuts, planned maintenance, and the forthcoming switch to winter grade gasoline, we anticipate a modest draw down in coming weeks."

US refineries were operating at 94.6% capacity last week, up from 94.5% the previous week and 92.5% during the same period a year ago.

US distillate inventories "remain well above normal seasonal levels," said Warburton. "The excess inventory position continues to be reflected in refiners' relatively low distillate yields and the weakness in distillate prices (and) cracking margins. With implied distillate demand remaining below year-ago levels and the threats of reduced jet fuel demand and low natural gas prices, overall refining margins are likely to remain below mid-cycle for the foreseeable future," he said.

With the volatility typical of the last day of trading of a near-month contract, benchmark light, sweet crudes for September delivery gained 27¢ to $30.11/bbl Tuesday on the New York Mercantile Exchange. However, the October position slipped by 3¢ to $28.77/bbl.

Analysts insist that a significant "war premium" has been added to crude futures prices and will likely continue until tensions ease between the US and Iraq.

Meanwhile, the September contract for unleaded gasoline jumped by 0.94¢ to 80.03¢/gal on NYMEX, prodded by mistaken anticipation that API would report another draw on US stocks. Heating oil for the same month was up 0.41¢ to 73.8¢/gal.

The September natural gas contract fell 10.1¢ to $3.17/Mcf Tuesday. "The market dipped below $3.20(/Mcf) early and spent much of the day recovering to $3.30(/Mcf), but dropped to the lows of the day on the close. Locals took profits and sold off acquired length," said analysts at Enerfax Daily. "Look for the market to consolidate (Wednesday), perhaps testing the lower support levels below $3.10(/Mcf)."

Profit-taking Tuesday pushed down futures prices for North Sea Brent crude on the International Petroleum Exchange in London. October futures had risen sharply over the past few days and appeared to be headed for $30/bbl, brokers reported. They said that increase appeared overdone, "even given bullish news and fundamentals."

The October Brent contract closed at $27.10/bbl, down 16¢ for the day after trading at $27.04-27.45/bbl. The September natural gas contract gained 2.7¢ to the equivalent of $1.91/Mcf on IPE.

The average price for the Organization of Petroleum Exporting Countries' basket of seven crudes lost 5¢ to $26.77/bbl Tuesday.