MARKET WATCHRising US oil stocks push down energy futures prices

Sam Fletcher
Senior Writer

HOUSTON, Oct. 30 -- Energy futures prices fell Wednesday with government and industry reports of increased US inventories of crude and heating oil.

The US Energy Information Administration reported early Wednesday that US oil stocks jumped by 3.6 million bbl to 291.8 million bbl during the week ended Oct. 24. Distillate fuel inventories rose by 1.6 million bbl to 134 million bbl during that same period, it said, with an increase in heating oil "more than compensating" for a decline in diesel fuel. However, US stocks of gasoline fell by 2.2 million bbl to 193.8 million bbl last week, EIA said.

Later Wednesday, the American Petroleum Institute estimated US oil stocks increased by only 282,000 bbl to 293.6 million bbl last week, with distillates gaining 155,000 bbl to 128.5 million bbl. But it said US gasoline inventories plummeted by more than 4 million bbl to 194.4 million bbl during that period.

August in October
The latest data on US inventories "look like something that was left over from August, with gasoline still doing all the work and heating oil behaving counter-seasonally," said Paul Horsnell, head of energy research at Barclays Capital Research, a division of Barclays Bank PLC, London.

Although US oil inventories increased overall, crude stocks "fell for the third straight week in the key Mid-West region," Horsnell noted.

"Gasoline demand remains extremely strong, running 301,000 b/d higher than last year for [October] to date," he said. "Gasoline inventories would normally be expected to reach their seasonal minimum over the next couple of weeks and then start rising. However, given strong demand, low [gasoline] imports, and a tendency over the last week for gasoline-producing refinery units to fall over, the seasonal minimum might still be undershot a little this year."

Earlier this week, Amerada Hess Corp. said mechanical problems triggered a 33% cut in gasoline production at the 450,000 b/d Hovensa LLC refinery. Hovensa, a joint venture on the Virgin Islands, is owned by Amerada Hess and Venezuela's state oil company, Petróleos de Venezuela SA. Also, Marathon Ashland Petroleum LLC was reported to have shut down a 192,000 b/d crude unit over the weekend for a week of unplanned maintenance (OGJ Online, Oct. 29, 2003).

"The ailing refinery units and strong weekly data for gasoline provide the potential for gasoline to take price leadership and support crude oil, which is a distinctly unusual turn of events for the end of October," Horsnell said.

Two consecutive weeks of growth in US inventories of heating oil present "a rather discordant pattern," he noted. "However, in the key demand area of the mid-Atlantic states, inventories are still progressing exactly as would be expected, albeit from a lower-than-normal base. Inventories are now back to normal levels in the main area for production (i.e., the Gulf Coast) but remain lower than normal in the main areas for consumption," Horsnell said.

As a result, he retains "a bullish bias on heating oil. However, to maintain that bias, it will be necessary for significant seasonal inventory draws to commence fairly imminently."

Record oil imports
US crude imports increased by 646,000 b/d to nearly 10.2 million b/d last week, "the highest weekly average ever during the month of October," EIA reported. API said crude imports were up by more than 1.6 million b/d to nearly 10.9 million b/d, while imports of petroleum products increased by 191,000 b/d to 2.6 million b/d.

However, Horsnell said, "One needs to qualify any view that [the high level of oil imports] might represent a glut. For the year to date, total US oil production is running 249,000 b/d lower than last year. Total oil demand is higher this year by 202,000 b/d."
Moreover, US oil imports were "overly tightened" last year, particularly in the second and third quarters, "so one would want some advance in imports, even if everything else was constant," he said. "Put all that together, and it becomes clear that US oil imports needed to be considerably higher this year just to keep matters on an even keel."

With the onslaught of peak winter demand just about to close the window of opportunity for building fuel stocks, Horsnell said, "It is not a bearish signal to find crude inventories to be still below 300 million bbl, given that the supply chain is likely to thin out a bit in coming months."

The Iraqi factor
In addition to the growth of US inventories, oil prices recently have been undermined by the prospect of increased production and export of Iraqi crude. However, Horsnell claims that some US officials' recent optimism that Iraq could increase its oil production to 6 million b/d in 3 years, from less than 2 million b/d currently, is "physically impossible."
Iraq's oil ministry "does indeed have a long-term target of 6 million b/d, but in 2014, not 2006," he said. A similar 10-year production target "was in force in 1990 before the first Gulf War, and today the practicalities have certainly not become any easier. A target of 6 million b/d by 2014 is more ambitious than the 1990 target, even if security were to improve dramatically, given that a further 13 years of neglect and corrosion [of Iraqi oil field facilities] have passed," Horsnell said.

Iraq's sustainable production capacity "is not just lower than it was in 1990—it is also falling," Horsnell noted. "To get to 6 million b/d production capacity and an associated 5.5 million b/d export capacity within a few years is, quite simply, physically impossible. Indeed, if Iraq were able to get sustainable capacity beyond 3 million b/d before 2006, we would consider that to be a major achievement under the circumstances."

Energy prices
The December and January contracts for benchmark US light, sweet crudes each lost 65¢ Wednesday to $28.91/bbl and $28.72/bbl, respectively, on the New York Mercantile Exchange. The cash spot market price for West Texas Intermediate crude at Cushing, Okla., dropped 65¢ to $28.93/bbl.

Heating oil for November delivery lost 1.18¢ to 78.79¢/gal on NYMEX. However, unleaded gasoline for the same month inched up by 0.12¢ to 83.13¢/gal.

The expiring November natural gas contract dipped by 2.7¢ to $4.46/Mcf on NYMEX, under pressure from "weak crude oil prices and mild weather forecasts into next week, despite a slightly firmer cash market," said analysts Thursday at Enerfax Daily. "The spot market saw some buying interest for November bid-week because some utilities did not want to pull from storage too early."

The NYMEX gas futures market also was affected Wednesday by uncertainty over EIA's planned revisions in its weekly report of US gas storage, analysts said. Starting with the report issued Thursday for the week ended Oct. 24, EIA expanded its sample size, updated the reference period for estimation parameters through June, and changed the methodology it previously used.

The resulting report showed 55 bcf of gas were injected into US underground storage last week, down from 84 bcf the previous week but up from 11 bcf during the same period last year. Total US gas storage now exceeds 3.1 tcf but is still 51 bcf below year-ago figures, although above the 5-year average by 82 bcf.

In London, the December contract for North Sea Brent oil plunged by 60¢ to $27.44/bbl Wednesday on the International Petroleum Exchange, falling back from earlier gains in that session based on rumors of declines in US inventories of crude and heating oil. Subsequent confirmation of increased stocks triggered aggressive selling as players liquidated long positions in the market. With the price support at $28/bbl now broken, analysts said, follow-through selling was expected.

The November gas oil contract gained $1 to $249.50/tonne Wednesday on IPE. The expiring November natural gas contract lost 11.4¢ to the equivalent of $5.60/Mcf in that market; the new near-month December contract was down by 10.2¢ to the equivalent of $5.76/Mcf.

The average price for the Organization of Petroleum Exporting Countries' basket of seven benchmark crudes declined by 19¢ to $27.58/bbl Wednesday.

Contact Sam Fletcher at [email protected]