MARKET WATCHLow US gasoline inventories make energy prices jump

Sam Fletcher
Senior Writer

HOUSTON, Aug. 22 -- Unleaded gasoline for September delivery shot up 9.57¢ to $1.10/gal Thursday on the New York Mercantile Exchange, pulling up other energy futures prices in the process, after the government reported commercial US gasoline inventories are at a 9-month low ahead of the Aug. 30-Sept. 1 Labor Day weekend in the US and Canada.

The US Energy Information Administration said US gasoline stocks fell by 1.2 million bbl to 196.9 million bbl during the week ended Aug. 15, the lowest level since Nov. 15, 2002. Commercial US oil inventories also were down, dropping by 1.6 million bbl to 278.8 million bbl last week.

US distillate fuel stocks rose by 1.2 million bbl to 121.1 million bbl during the same period, with an increase in heating oil supply more than offsetting a decrease in diesel. "However, distillate fuel inventories remain near the bottom end of the normal range for this time of year. As of Aug. 15, total commercial inventories are 91.3 million bbl less than last year," EIA reported Wednesday.

The American Petroleum Institute said US gasoline stocks dropped 2.1 million bbl to 197.9 million bbl last week, with oil inventories down by 2 million bbl to 279.3 million bbl. It said US distillate stocks increased by 1.6 million bbl to 118.5 million bbl.

API earlier reported the average US retail price for all types of gasoline last week increased by 5.6¢ to $1.67/gal as of Aug. 18. The current average price for US gasoline is 10¢ less than a mid-March peak of $1.77/gal, but about 15¢/gal higher than in early June and up by 23.5¢/gal from the average price on Aug. 16, 2002, API said (OGJ Online, Aug. 19, 2003).

Falling on the first Monday of each September, Labor Day marks the official end of the peak US summer driving season.

NYMEX energy prices
The October contract for benchmark US light, sweet crudes jumped by 84¢ to $31.88/bbl Thursday on NYMEX, while the November position advanced by 86¢ to $31.61/bbl. Heating oil for September increased by 3.06¢ to 83.3¢/gal.

The September natural gas contract escalated by 15.6¢ to $5.28/Mcf on NYMEX. "Locals (distribution companies) tried to knock (the price) down early, but when crude oil jumped higher, the shorts (traders whose net positions in the natural gas futures market had an excess of open sales over open purchases) had to run for cover," analysts said Friday at Enerfax Daily. The resulting purchases by those traders helped push up gas prices.

The rally is unlikely to last. "Despite warm midweek weather, the heat is expected to be short-lived, with Northeast and Midwest readings predicted to return to near seasonal levels by this weekend," Enerfax analysts said.

UBS Warburg LLC, New York, Friday lowered its 2003 composite spot market price forecast for natural gas to $5.35/Mcf from $5.70/Mcf, citing "lackluster summer temperatures, stronger-than-expected demand destruction, reduced NGL stripping, and resulting faster-than-expected storage refill pace."

Ronald Barone of UBS Warburg reported, "With composite spot prices averaging $5.88(/Mcf during the first half of the year), demand for natural gas was inevitably going to deteriorate. Industrial demand destruction was evident in the fertilizer, chemical, and metals industries, as well as power generators with alternate fuel-switching capacity. Though we were expecting a moderate level of demand destruction when raising our forecast on June 9, the ensuing underlying elasticity was greater than expected."

UBS Warburg is retaining it s spot price forecast at $4.50/Mcf for 2004 and $4/Mcf in 2005.

Natural gas
EIA said Thursday that 78 bcf of natural gas were injected into US underground storage during the week ended Aug. 15, down from 82 bcf the previous week but up from 37 bcf for the same period in 2002.

The latest injection figure reflects about 5 bcfd of "backed-out" demand for natural gas, "after adjusting for minimal demand loss due to the (Aug. 14) Northeast blackout," said Robert S. Morris, Banc of America Securities Inc., New York. That's roughly the amount of gas that "needs to be backed out" through October to free up enough supply for US storage to reach the comfort zone of 3 tcf before the winter heating season begins, he said.

"We estimate that around 2 bcfd of (previously) 'lost' demand has now been recaptured since late June: at least 1.5 bcfd due to fuel-switching and perhaps as much as 500 MMcfd from other industrial demand," Morris said.

The amount of last week's injection of gas into storage indicates that as much as 2.5 bcf of previous industrial and commercial demand was lost because of the shutdown of gas-fired power plants during the 17 hours that the electric power grid was down in the Northeastern US and parts of Canada, he said. Most of the gas-fired plants knocked out by the power failure were back in operation the next day.

In addition, Morris noted. "Nine US nuclear power plants with a combined total generating capacity of roughly 8,000 Mw went offline due to the blackout. Nuclear plants typically shut down automatically in response to instability or degradation of the electricity grid, in order to protect equipment. However, it can take several days to return these plants to full service."

Eight of the plants were back online early Thursday, "although not all are producing at full capacity," he said. "We estimate that the 'lost' nuclear generation during the past week should result in roughly 9 bcf of incremental natural gas demand, which should be reflected in next week's injection (report). However, this is likely to be partially offset as natural gas demand was reduced somewhat in the aftermath of the blackout as several of the impacted chemical manufacturers, refineries, and automotive producers were slow to resume operations once power was restored."

Other energy prices
In London, the October contract for North Sea Brent oil increased by 87¢ to $29.71/bbl Thursday on the International Petroleum Exchange. The September natural gas contract dipped by 0.3¢ to the equivalent of $2.36/Mcf on IPE.

The average price for the Organization of Petroleum Exporting Countries' basket of seven benchmark crudes gained 71¢ to $28.73/bbl Thursday.

Contact Sam Fletcher at [email protected]