Market watch: Refinery curtailments push up energy futures prices

An increasing number of US refinery problems in the middle of the summer driving season pushed up gasoline futures prices Tuesday on the New York Mercantile Exchange.

By OGJ editors

HOUSTON, July 17 -- An increasing number of US refinery problems in the middle of the summer driving season pushed up gasoline futures prices Tuesday on the New York Mercantile Exchange, with other energy commodities following that lead.

Curtailments of refining operations apparently are making traders nervous, although US demand for gasoline this year remains lower than previously expected. It was reported Tuesday that ExxonMobil Corp. is preparing for 4-6 weeks of planned maintenance in October of a 119,500 b/d reformer its Baytown, Tex., refinery.

The August contract for unleaded gasoline jumped 3.68¢ to 84.53¢/gal Tuesday on NYMEX.

Benchmark US light, sweet crudes for the same month increased by 68¢ to $27.75/bbl, while the September position gained 72¢ to $27.76/bbl.

Heating oil for August delivery was up 1.54¢ to 71.09¢/gal. The August natural gas contract rose 7.9¢ to $2.86/Mcf.

"The (gas futures) market opened higher and rose throughout the morning, but dropped back somewhat in the afternoon. The market finished on the lower end of its range and was unable to maintain session highs into the low $2.90s(/Mcf)," Enerfax Daily reported Wednesday.

Despite Tuesday's small up-tick, Enerfax analysts said, "The August contract price has fallen 28% since mid-May when it hit $3.95(/Mcf). Look for the market to remain range-bound until Thursday's (Energy Information Administration) storage report, since fundamentals are not pressuring it one way or the other."

"Both crude oil and natural gas storage levels over the next several months will hinge on the pace of economic recovery, which will underscore any incremental demand growth for each commodity," said Robert Morris at Salomon Smith Barney Inc. in New York. "Nonetheless, the longer-term outlook for natural gas prices in North America remains quite solid, in our opinion."

Following the close of NYMEX trading Tuesday, the American Petroleum Institute reported US crude inventories fell by 4 million bbl to 312.1 million bbl last week. However, US gasoline stocks increased by 1.3 million bbl to 215.3 million bbl. US stocks of distillates jumped by 4.3 million bbl to 134.3 million bbl.

"Despite another fall in crude inventories, the inconsistency in the draw given recovering crude imports and higher product inventories are likely to be viewed as moderately bearish by the market," Matthew Warburton at UBS Warburg LLC, New York, said Wednesday. "Overall, total crude and product inventories increased by 300,000 bbl to 735.3 million bbl and remain comfortable despite falling below last year's levels for the first time this year."

US oil imports increased by 772,000 b/d to more than 9 million b/d last week, while imports of petroleum products were up 466,000 b/d to 2.5 million b/d. At the same time, US gasoline production declined by 30,000 b/d to 8.6 million b/d, with US refineries operating at 95% capacity, compared with 95.4% the previous week and 94.8% during the same period a year ago, API said.

Warburton noted that crude inventories in the Petroleum Administration for Defense District (PADD) 2, which encompasses the US upper Midwest, fell last week to the lowest level for that area since last August. That, he said, "highlights the data contradiction, given half of the crude import uplift came from Canada."

Moreover, he said, "The continuing tightness of PADD 2 inventories should reinforce the backwardation in the market, further attracting crude imports to the US and tightening global markets given the persistently low Iraqi exports."

The bulk of the build of US distillate inventories was in PADD 1, which includes all of the Atlantic coastal states. "Imports remained robust, and implied demand fell by 154,000 b/d as US natural gas prices have continued to weaken," said Warburton.

"With no material reduction in distillate yields given the current level of gasoline demand, refiners could face an accelerating inventory issue as we progress through the US driving season, especially as natural gas inventories remain robust," he said. That could have "potential negative ramifications for (second half) refining margins, which still remain below mid-cycle levels," said Warburton.

In London, the August contract for North Sea Brent oil advanced by 22¢ to $26.28/bbl Tuesday on the International Petroleum Exchange. With increased concerns over a possible conflict between the US and Iraq, brokers said, oil prices in that market appear stable at just above $26/bbl.

The August natural gas contract inched up 0.6¢ to the equivalent of $2.15/Mcf Tuesday on the IPE.

The average price for the Organization of Petroleum Exporting Countries' basket of seven benchmark crudes increased by 12¢ to $25.59/bbl.

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