MARKET WATCHEnergy futures prices retreat ahead of US holiday
Sam Fletcher
Senior Writer
HOUSTON, July 3 -- US consumers rolled toward a long 4th of July holiday weekend with reports Wednesday of unusually tight gasoline inventories and a drop in natural gas futures prices to near a 3-month low on the New York Mercantile Exchange, in expectation of another large build in US underground natural gas storage.
NYMEX futures prices for oil and petroleum products also slumped Wednesday as traders took profits from a rally over the previous three trading sessions that was sparked by Tropical Storm Bill threatening Louisiana refineries and by the strike in Nigeria over the increased price of petroleum products there (OGJ Online, July 2, 2003).
Traders expecting an increase in US inventories of oil instead were told Wednesday that crude and gasoline stocks fell during the week ended June 27. The American Petroleum Institute reported US oil inventories dropped by 2.1 million bbl to 278.5 million bbl in that period, with gasoline stocks falling by 2.3 million bbl to 207.8 million bbl. It said US distillate inventories barely increased during the period by 23,000 bbl to 109.3 million bbl
The US Energy Information Administration said US gasoline inventories plunged by 3.2 million bbl to 205 million bbl during the week ended June 27, with crude stocks falling 2.1 million bbl to 282.1 million bbl. It put the increase of distillate stocks at 300,000 bbl to 109.7 million bbl.
"The main story is yet again gasoline," said Paul Horsnell, J.P. Morgan Securities Inc., London, in a Thursday report. "The seasonal build in (US gasoline) inventories came to an end 3 weeks earlier than normal. Inventories are now 600,000 bbl lower than they were at the end of April, when a normal pattern over that period would be a build of 10 million bbl," he said, referring to EIA data.
"From this point, inventories would normally fall until the start of September, on average falling by about 20 million bbl from a base of around 217 million bbl. This year, the end of June base is just 205 million bbl," Horsnell said.
He warned, "To finish (this summer driving) season at normal levels, inventories can only fall at one-third of the normal rate. To achieve that, price differentials will have to adjust sharply, and so far that is not happening."
Horsnell noted, "In 2001, when gasoline prices spiked to $17/bbl above crude oil, the end of June inventory base was 221 million bbl. Gasoline prices are currently less than $7/bbl above crude oil, and it doesn't look to be enough yet. The end of June base was almost the same in 2000, when demand was lower and gasoline was $10/bbl higher than crude oil."
His conclusion: "The market may have been caught napping in the gasoline situation. Inventories have failed to rise even when weather in June was bad and demand subdued. However, the breaking of the bad weather has produced a very high implied demand figure in the last week of 9.48 million b/d."
Iraq
Meanwhile, Wood Mackenzie Ltd., an Edinburgh-based consultant, said Thursday that Iraq's best course would be to remain a member of the Organization of Petroleum Exporting Countries.
Despite "views currently circulating within US government agencies" that Iraq—a founder of the cartel—might pull out of OPEC as part of its postwar reorganization, Wood Mackenzie analysts said Iraq's continued membership in OPEC would provide the "better option in maintaining oil prices and stability in the market, whilst providing for the most efficient utilization of Iraq's reserves over the long term."
They predicted, "Inevitable political uncertainty and delays in negotiation and signature of development contracts will constrain (Iraq's) oil production and revenues close to prewar levels through 2006." Nevertheless, they concluded, "Iraq will benefit, both financially and politically, from resuming its position within the organization as OPEC's share of the global market increases towards 2010 and beyond."
That echoes similar statements by Issam al-Chalabi, former Iraqi oil minister, at a June energy conference in Turkey. For Iraq to give up its OPEC membership, said Al-Chalabi, "goes against the country's interests and will serve no purpose" (OGJ Online, July 1, 2003). He said it would take Iraq at least 3 years to reach a production level of 3.5 million b/d, "and many more years to exceed it."
Iraq's "oil infrastructure is still being destroyed far faster than it can be patched up," Horsnell said Thursday. "The last week has brought more reports of burning pumping stations. We expect that the oil market will have yet to absorb further delays in achieving significant levels of Iraqi exports beyond those delays already priced in."
Energy prices
The August contract for benchmark US light, sweet crudes fell by 25¢ to $30.15/bbl Wednesday on NYMEX, while the September contract lost 24¢ to $29.81/bbl. Heating oil for August delivery dropped 0.69¢ to 78.33¢/gal. Unleaded gasoline for the same month was down 0.18¢ to 87.99¢/gal.
The natural gas market continued its slump, with the August contract losing 11.8¢ to $5.20/Mcf Wednesday on NYMEX. It was "pressured by technical selling and a soft physical market amid expectations for soft demand during the holiday-shortened week," said analysts Thursday at Enerfax Daily.
EIA reported Thursday the injection of 97 bcf of gas into US underground storage in the week ended June 27, somewhat lower than analysts expected. That also was down from the record injection of 127 bcf the prior week but up from 68 bcf injected during the same period last year. US gas storage now stands at nearly 1.7 tcf, which is 624 bcf below year-ago levels and 348 bcf below the 5-year average.
"The heat wave that blanketed the eastern third of the country last week proved to be enough to mitigate the ongoing impact of demand destruction and attractive 'inject now, sell forward' incentives," said Ronald Barone at UBS Warburg LLC, New York. EIA's latest injection figure "was supported by a 5% increase in US electric output" in the same period and ended "a 4-week string of triple-digit refills," said Barone.
In London, the August contract for North Sea Brent oil lost 34¢ to $27.97/bbl Wednesday on the International Petroleum Exchange. However, the August natural gas contract inched up 2.4¢ to the equivalent of $2.91/Mcf on IPE.
The average price for OPEC's basket of seven benchmark crudes gained 12¢ Wednesday to $27.31/bbl.
Contact Sam Fletcher at [email protected]