MARKET WATCHLow US fuel oil stocks send energy prices soaring

Sam Fletcher
Senior Writer

HOUSTON, Oct. 10 -- Energy futures prices soared Thursday as cooler weather reminded traders that US inventories of distillate fuel remain 18% below year-ago levels just a few weeks prior to the start of the peak winter demand period.

The US Energy Information Administration reported Wednesday that US distillate fuel stocks increased by a meager 200,000 bbl to 131.5 million bbl during the week ended Oct. 3, with an increase in diesel fuel "more than offsetting" a decrease in heating oil during that period.

Futures prices for oil and petroleum products fell Wednesday in New York and London markets, as traders initially focused on reports of large increases in commercial US crude inventories during the previous week. But both markets recouped all of those losses by large margins Thursday.

EIA reported US crude inventories jumped by 5.4 million bbl to 286.2 million bbl during the week ended Oct. 3, while the American Petroleum Institute put the gain at 8.2 million bbl to 290.2 million bbl (OGJ Online, Oct. 9, 2003).

World oil production rises
World oil production increased by 300,000 b/d to 80.1 million b/d in September, the Paris-based International Energy Agency reported early Friday. Prices for benchmark Brent and West Texas Intermediate crudes fell by more than $4.50/bbl last month because of weaker demand and rising supplies. But the Sept. 24 decision by the Organization of Petroleum Exporting Countries to reduce its production quotas by 900,000 b/d, effective Nov. 1, stemmed that fall in prices, said IEA officials. WTI ended the month at $29.41/bbl, down by $2.45 from the end of August, they said.

OPEC's surprise move "was generally regarded as a pre-emptive strike—a show of resolve on the part of the producer group to do whatever is necessary to support prices," IEA officials said.

It also "constitutes an effective start to the political reintegration of Iraq," they said. Despite continued looting and sabotage of that country's oil field infrastructure, IEA said, "Iraqi production has been recovering more quickly than expected. Barring further infrastructure disruptions, the reactivation of the northern pipeline route into Turkey should pave the way for further export opportunities, and therefore higher production, in the future."

OPEC ministers are scheduled to meet again Dec. 4 in Vienna to review the world oil market. However, additional quota reductions among the 10 active OPEC members, minus Iraq, are "unlikely without cooperation from non-OPEC producers," IEA said.

"OPEC is set to lose market share for the fifth consecutive year," IEA officials said. "Given its focus on maintaining revenue streams, OPEC will need ever higher prices to offset lower production. Higher prices encourage more non-OPEC supply and curtail demand."

Energy markets rebound
Heating oil for November delivery shot up by 4.22¢ to 85.42¢/gal on the New York Mercantile Exchange, wiping out the previous day's loss of 0.71¢/gal. Unleaded gasoline for the same month registered an even stronger rebound, up 5.03¢ to 88.15¢/gal. The November contract for benchmark US light, sweet crudes gained $1.20 to $31.01/bbl Thursday on NYMEX, while the December position advanced by $1.19 to $31.09/bbl. The spot market price for WTI at Cushing, Okla., was up by $1.20 to $31.03/bbl Thursday.

The November natural gas contract on NYMEX jumped by 34.6¢ to $5.49/Mcf Thursday in a buying spree among traders scrambling to cover open sales contracts that in turn triggered technical purchase orders as key resistance points were breached.

"The market opened steady but jumped higher after the EIA storage report was released [early Wednesday], then leveled off somewhat above $5.35[/Mcf] until late afternoon when prices soared higher again as shorts (traders with low-priced sales obligations) panicked near the close" of that session, said analysts Friday at Enerfax Daily.

Analysts said the gas price rally "was not much based on" market fundamentals of supply and demand, since the EIA report of 75 bcf of natural gas injected into US underground storage last week was in line with market expectations (OGJ Online, Oct. 9, 2003). "Massive short covering by [investment] funds was the main driver, taking their cue from soaring crude oil prices," they said.

In London, the November contract for North Sea Brent oil escalated by $1.41 to $30.14/bbl Thursday on the International Petroleum Exchange. The November natural gas contract gained 1¢ to the equivalent of $4.17/Mcf, and gas oil for the same month jumped by $12.50 to $257/tonne on IPE.

The average price for OPEC's basket of seven benchmark crudes increased by 61¢ to $28.60/bbl Thursday.

Contact Sam Fletcher at [email protected]