Market watch: Reduced inventories, increased war risks drive up energy prices

Energy futures prices jumped in New York and London on Thursday as markets reacted to the surprise of a serious draw of US inventories of oil and petroleum products.

By OGJ editors

HOUSTON, Aug.16 -- Energy futures prices jumped in New York and London on Thursday as markets reacted to the surprise of a serious draw of US inventories of oil and petroleum products at a time when traders are becoming more concerned about possible disruption of Middle East crude supplies.

The September contract for benchmark US light, sweet crudes shot up 91¢ to $29.06/bbl on the New York Mercantile Exchange. The October position jumped 81¢ to $28.38/bbl.

Prices for refined products also escalated, with heating oil for September delivery rising 2.64¢ to 72.78¢/gal. Unleaded gasoline for the same month was up 2.12¢ to 79.76¢/gal.

The September natural gas contract zoomed up 21.7¢ to $3.13/Mcf on NYMEX. "Some traders had anticipated a higher (US gas) storage injection last week than the 53 bcf reported by the (US Energy Information Administration on Thursday) morning, and that helped get the rally started," said analysts at Enerfax Daily. "Once the market rallied beyond $3.059(/Mcf), then buy-stop orders got hit, pushing up the September contract to $3.10(/Mcf). Then late buying by funds pushed it higher yet near the end of the day."

Enerfax analysts warned Friday, "Look for profit-taking today as the market tries to stay above $3(/Mcf). Resistance is seen at $3.17(/Mcf), with support at $3.05(/Mcf)."

Meanwhile, Ronald Barone, with UBS Warburg LLC in New York, said Friday, "The 6-week string of above normal temperatures came to an abrupt end last week, as the nation experienced only its fourth week of cooler than normal conditions this season." National cooling degree-day temperatures for the week ending Aug. 10 were 4% lower than normal and 22% lower than last year, he said.

"Though temperatures were slightly cooler than normal, we believe it is impressive that the industry was capable of injecting a solid 53 bcf of gas during a time when—as evidenced by continued weak net gas flows in the producing region—several cash-strapped energy merchants are not injecting (or are in fact withdrawing) supplies to improve liquidity positions," said Barone. "This notable undercurrent could suggest that the short-term supply-demand imbalance is looser than it appears and that cash prices are being primarily supported by NYMEX, which itself is being supported by the increasingly bullish intermediate-term outlook from a recent acceleration in deliverability decline rates and crude rally."

So far this summer, US temperatures generally are averaging 10% higher than normal and 2% higher than during the same period last year.

In London, technical strengths and bullish sentiment also pushed up North Sea Brent crude futures on the International Petroleum Exchange. The expectation that the US will again go to war with Iraq remains as strong as ever in that market and has attracted heavy fund and speculator buying, said brokers. They said traders did not want to sell short in case a US attack on Iraq sends oil prices soaring higher.

The September Brent oil contract gained 42¢ to $26.80/bbl Thursday, which was "another bullish technical signal" in itself, analysts said. However, the September natural gas contract fell 6.6¢ to the equivalent of $1.88/Mcf on the IPE.

The average price for the Organization of Petroleum Exporting Countries' basket of seven benchmark crudes jumped 46¢ to $26.34/bbl Thursday.

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