MARKET WATCHIncreased US gasoline inventory undercuts energy futures markets

Sam Fletcher
Senior Writer

HOUSTON, July 17 -- The New York gasoline futures market plummeted Wednesday, bringing down other energy commodity prices with it, as government and industry agencies reported big increases in US fuels inventories.

The US Energy Information Administration said Wednesday that US gasoline inventories jumped by 3.9 million bbl to 209.4 million bbl during the week ended July 11. Total distillates stocks increased by 5.5 million bbl to 114.7 million bbl during the same period, while US oil inventories fell by 3.6 million bbl to 278.6 million bbl.

The American Petroleum Institute was even more bearish, reporting US gasoline stocks climbed by 5.2 million bbl to 209.5 million bbl in the same period, while distillates increased by 4.8 million bbl to 113.4 million bbl. It said US oil stocks fell by 4.8 million bbl to 277.7 million bbl.

"US petroleum demand has weakened considerably in the past several months," said Ronald J. Planting, API's manager of information and analysis, in a separate report Wednesday (OGJ Online, July 16, 2003). "Gasoline deliveries (to retail outlets), for example, turned negative in the second quarter (of 2003) after only a weak increase in the first. This reflected lingering effects of higher prices, inclement weather, and a tepid economy," he said.

However, Planting said, moderation of international prices for crude contributed to a surge in US oil imports during the second quarter. "Product imports have also remained strong," he said. "Together, these pushed total US imports to their highest quarterly level ever. Imports amounted to 63.5% of (total US) petroleum use, also a new high. In addition, gasoline imports surpassed 1 million b/d for the first time."

An opposing view
However, Paul Horsnell, J.P. Morgan Securities Inc., London, said the "supposed weakness" of US oil demand is "not really quite so dire." Referring to EIA data, he said, "New all-time records for demand have been set in each of the last 3 months. The previous all-time peak for June was in 2000, one of the factors that started to jolt the market higher, and June 2003 exceeded that by 254,000 b/d."

He said total US demand for oil and petroleum products during the first 6 months of 2003 "has been 650,000 b/d higher than for the same period in 2000, of which gasoline demand growth accounts for 396,000 b/d. Gasoline demand may look anemic compared to 2002, but (its) growth is significant relative to any other year. Compared to 2000, the system is now running at a slightly higher gasoline inventory level while trying to meet higher demand. In terms of days of forward cover, current inventories are lower."

As for the latest build in petroleum products inventories, Horsnell said, "We could be relaxed if this week's data was clearly the start of a trend. However, the implied demand number is so weak as to be implausible (1.05 million b/d lower than the previous week), which suggests that there could be a few oddities in this particular data."

In 2000, the Organization of Petroleum Exporting Countries "was producing 28 million b/d and had about 3.5 million b/d of spare capacity. Now output is closer to 26 million b/d, and we would not put usable spare capacity at much more than 2 million b/d," Horsnell said.

"So in all, compared to 2000, we are starting at a similar price level, with lower inventories in total, significantly higher demand, and less slack in OPEC," he said. "In that light, the bull case for $37(/bbl) does not look impossible, even if we cannot at this moment make it a base case."

Such a jump in oil prices "becomes more likely the colder is the US winter, the more refinery accidents and hurricanes happen, the more the geopolitics of the market remain turbulent, the more oil demand continues to be bolstered by substitution from natural gas, and the more pronounced is the US economic upturn," Horsnell said.

Energy prices
Unleaded gasoline for August delivery plunged by 4.21¢ to 89.02¢/gal Wednesday on the New York Mercantile Exchange. Heating oil for the same month dropped 2.42¢ to 78.91¢/gal. The August contract for benchmark US sweet, light crudes lost 57¢ to $31.05/bbl, while the September position fell 70¢ to $30.41/bbl.

The August natural gas contract dropped below the $5/Mcf level, down 8.6¢ to close at $4.93/Mcf on NYMEX. The market was "undermined by sinking crude oil and gasoline futures, and a weak cash market after some Gulf of Mexico supplies (that were) shut in ahead of Hurricane Claudette were restored. The September contract lost 9.7¢ to $4.95(/Mcf). Other months ended down less," said analysts Thursday at Enerfax Daily.

They said, "There is probably more than 1 bcf of natural gas still off line because of the storm. Based on previous (US Minerals Management Services) data and assuming most volumes will be restored by (Friday), industry sources estimate Claudette will have cut about 6 bcf of output."

EIA reported Thursday the injection of 93 bcf of natural gas into US underground storage during the week ended July 11. That amount was less than the Wall Street consensus and down from injections of 111 bcf the previous week, but up from 69 bcf during the same period last year. US natural gas storage now stands at 1.87 tcf, which is 556 bcf less than the year-ago level and down 300 bcf from the 5-year average.

In London, the August contract for North Sea Brent oil lost 45¢ to $28.72/bbl on the International Petroleum Exchange, in reaction to the build of US gasoline inventories.

Brokers said that market has reacted strongly to US inventory data during the past few weeks, with stock declines helping to support IPE oil prices around $29/bbl. However, they said the market appeared to be overbought, and the latest data provided justification for a technical correction that allowed traders to take profits from the previous rally.

The August natural gas contract dipped by 0.65¢ to the equivalent of $2.697/Mcf Wednesday on IPE.

The average price for OPEC's basket of seven benchmark crudes was down 11¢ Wednesday to $27.87/bbl.

Contact Sam Fletcher at [email protected]