MARKET WATCHMaximum effort to build US stocks undermines oil futures prices

Sam Fletcher
Senior Writer

HOUSTON, June 5 -- Energy futures prices retreated Wednesday on reports of large builds in US inventories of crude, gasoline, and distillates. But that build was achieved only through maximum effort, an analyst said.

The American Petroleum Institute reported US crude stocks jumped by 1.99 million bbl to 288.4 million bbl during the week ended May 30, while gasoline inventories shot up by 3 million bbl to 209.7 million bbl and distillate stocks increased by 2.1 million bbl to 105.3 million bbl. The US Energy Information Administration recorded an even bigger increase in US crude stocks for that period, up 2.8 million bbl to 289 million bbl. It reported US gasoline stocks jumped by 2.3 million to 207.3 million, with distillates up by 3 million to 104.5 million.

"Finally" normal
"US weekly data have finally shown a normal scale of seasonal build," Paul Horsnell reported Thursday at J.P. Morgan Securities Inc., London. But the 9 million bbl increase in total US inventories noted by EIA "closed the deficit below the 5-year average by a slight 800,000 bbl, leaving it at a still daunting 101 million bbl," he said.

The "main feature" of the latest EIA report was the rise in US refinery runs of crude, "which moved above 16 million b/d for the first time ever. This took refinery utilization rates to 98%, which in effect means that the refinery system is now running at its full potential and probably beyond its sustainable potential," said Horsnell.

Although that resulted in a normal build of oil and petroleum product stocks, he said, "This normality has only been achieved by running the system at full blast, and in a week of high crude oil imports. Put another way, there is at the moment absolutely no slack within the US oil system, and no margin for unscheduled refinery glitches or logistical problems."

Moreover, the latest rise in US gasoline stocks reported by EIA only partially offset a drop of 3.4 million bbl during the week ended May 23. That, said Horsnell, "leaves (US gasoline) inventories slightly lower than they were a month ago, a period over which there should have been rapid builds."

Energy prices
The July contract for benchmark sweet, light crudes dropped 62¢ to $30.05/bbl Wednesday on the New York Mercantile Exchange while the August position retreated by 55¢ to $28.95/bbl. Unleaded gasoline for July delivery fell 2.36¢ to 86.43¢/gal. Heating oil for the same month was down 1.3¢ to 75.22¢/gal.

The July natural gas contract inched up by 1.5¢ to $6.38/Mcf on NYMEX for "the highest front-month finish since early March," said analysts Thursday at Enerfax Daily. "The market opened way up and quickly rallied above $6.60(/Mcf), but just as quickly tumbled to the low of the day at $6.22(/Mcf) before noon, then finished the afternoon basically trading between $6.35-6.45(/Mcf) in a wild choppy session," analysts said. "Rising cash prices helped send futures prices higher, along with nervousness of speculators about being short in the market."

Meanwhile, they said, "Fundamentals in the market remain the same, with concerns about summer hot weather coming, worries about a tropical storm season (in the US gas-producing sector of the Gulf of Mexico), and anticipation of filling (US underground gas) storage for next winter."

In London, the July contract for North Sea Brent oil lost 47¢ to $26.81/bbl on the International Petroleum Exchange. The July natural gas contract gained 3¢ to the equivalent of $2.76/Mcf on IPE.

The average price for the Organization of Petroleum Exporting Countries' basket of seven benchmark crudes lost 41¢ to $26.72/bbl Wednesday.

OPEC outlook
With oil markets still tight, Horsnell said, there is no need for OPEC members to cut production at their upcoming June 11 meeting in Doha, Qatar. "For the third quarter at least, the current quota level for the OPEC 10 (minus Iraq) does not seem to need any adjustment, and continued production above the ceiling will be necessary to help foster a normal (third quarter) inventory build," he said. "The risk adverse strategy would be for OPEC to prune a little, but, with prices now in the upper half of the target band, the incentive to be overly proactive at this point does appear to be fairly limited."

He added," Iraq does not appear to represent any sort of 'tipping point' for the market, or any force that is large enough to force prices substantially lower. While some exports out of storage will resume later this month, we believe that the market will continue to be surprised at the slowness of output recovery in Iraq and by the length of time before the security situation allows for a stabilization of Iraqi capacity."

Contact Sam Fletcher at [email protected]