MARKET WATCHNYMEX gasoline futures price hits 100-day high in market rally

Sam Fletcher
Senior Writer

HOUSTON, July 10 -- Gasoline futures prices surged to a 100-day high Wednesday on the New York Mercantile Exchange, boosting crude and heating oil futures in the process, as traders reacted to refinery problems in Texas and California and fears that Tropical Storm Claudette may strike the US Gulf Coast as a possible hurricane some time next week.

Meanwhile, Edinburgh-based consultant Wood Mackenzie Ltd. said Thursday that Venezuela's rapid rebound in oil production this year to prestrike levels has likely damaged the long-term deliverability of some fields and diverted potential investment capital. As a result, it said, Venezuelan production could fall to a new low of 2.5 million b/d by 2008.

In other action Thursday, the National Petrochemical & Refiners Association filed a written statement with the US Senate Energy & Natural Resources Committee, warning that continued high prices for natural could result in "lost US jobs, a worsening trade balance, and further loss of US industrial leadership."

The US Energy Information Administration early Thursday reported another large injection of natural gas into US underground storage—111 bcf during the week ended July 4. That exceeded analysts' forecasts for the week shortened by the 4th of July holiday; it also was up from injections of 97 bcf the previous week and 67 bcf during the same period a year ago. US natural gas storage now stands at 1.77 tcf, down 580 bcf from a year ago and 317 bcf below the 5-year average.

Market prices
Following consecutive gains in three previous sessions, NYMEX's August contract for unleaded gasoline shot up 3.55¢ to 94.01¢/gal Wednesday, the highest closing for a near-month gasoline contract since Mar. 31.

Benchmark US sweet, light crudes for August delivery increased by 66¢ to $30.88/bbl Wednesday, while the September position escalated by 71¢ to $30.63/bbl. The August heating oil contract jumped by 2.56¢ to 80.47¢/gal. The August natural gas contract inched up 1.7¢ to $5.52/Mcf Wednesday on NYMEX.

In London, the August contract for North Sea Brent oil was up 74¢ to $28.71/bbl on the International Petroleum Exchange. However, the August natural gas contract continued to decline, down 2.2¢ to the equivalent of $2.79/Mcf on IPE.

The Organization of Petroleum Exporting Countries' basket of seven benchmark crudes increased by 60¢ to $27.43/bbl Wednesday.

Product market tightens
The gasoline market rally was spurred Tuesday by a report that Shell Deer Park Refining Co. had shut down one of two catalytic reformers at its 340,000 b/d complex in Deer Park, Tex., for unscheduled maintenance that could take 7-10 days to complete (OGJ Online, July 9, 2003). Buying increased Wednesday when Valero Energy Corp. said it had taken down a 35,000 b/d hydrocracker for repairs at its 165,000 b/d Benicia, Calif., refinery. Company officials provided no estimate for the downtime at that facility.

Neither incident is expected to have a major impact on US gasoline supplies. But with US gasoline inventories already abnormally low during peak the summer driving season, any supply disruption is almost certain to trigger market reaction.

EIA reported Wednesday that US gasoline inventories increased by only 500,000 bbl to 205.5 million bbl during the week ended July 4. US crude inventories were up only 100,000 bbl to 282.2 million bbl in the same period, while distillate stocks fell by 500,000 bbl to 109.2 million bbl, EIA officials said. The American Petroleum Institute's report for the same period was even more pessimistic, with US gasoline stocks down by 2.5 million bbl to 204.3 million bbl. API said US distillates dropped 677,000 bbl to 108.7 million b/d, but US crude stocks were up by 3.96 million bbl to 282.4 million bbl.

So far this year, the tightness in the US market "has moved fairly consistently towards oil products and away from crude oil," said Paul Horsnell, head of energy research at J.P. Morgan Securities Inc., London. "The (US) deficit in oil products from the 5-year average is now at its highest this year, having widened in the last week by 400,000 bbl."

Meanwhile, the international market's focus on US inventories has diverted attention from Europe, where gasoline inventories at the end of June were reported to be "more than 17 million bbl below their 5-year average," Horsnell reported Wednesday.

"US inventories are being held up by record high imports," he said. "But if Europe is now running low itself, then it is going to be hard to maintain (US) imports close to 1.1 million b/d for the rest of the summer."

Moreover, he said, "It's probably a month or so too early for traders to go into overdrive about it, but (US) heating oil inventories are not climbing as fast as they need to be in order to close the gap below normal. The situation can still be salvaged, but it won't be, as long as heating oil's premium to crude remains as low as it is now."

Venezuela
In the rush to restore Venezuela's oil production to 3 million b/d following the 63-day general strike that ended in February, "spare capacity that was shut in to conserve the deliverability of giant oil fields in eastern Venezuela is currently being utilized to compensate for the loss in capacity from the more mature fields in the west," said Gero Farruggio, senior consultant for Wood Mackenzie.

"We believe the current level of production cannot be maintained," Farruggio said. "History has shown that Venezuelan oil fields have critical investment needs." Fields operated by Petroleos de Venezuela SA, the national oil company, "are likely to exhibit the strong decline levels experienced in recent years as a result of under investment," he said.

Before the strike, fields operated by PDVSA contributed two-thirds of Venezuela's total oil production, with fields operated by various international oil companies (IOC) making up the remainder, analysts said. Venezuela is the world's fifth largest exporter of crude oil and a major supplier to the US.

"Some of the production deficit will be picked up by IOC fields, which have enjoyed a relaxation of their OPEC quotas (since the strike). However, this will be limited to a 10% increase from current IOC production by 2005," said Luke Parker, a Wood Mackenzie consultant. "It is unlikely that new discoveries such as the Tomoporo field, which PDVSA intends to tender under terms of the new hydrocarbon law, will come on stream before 2008," he said.

The harsh fiscal terms of that new law are "discouraging further IOC investments," while much of the revenue generated by PDVSA is being used to fund government-financed social programs instead of reinvested into oil and gas exploration and development programs. As a result, said Wood Mackenzie consultants, "It is hard to see where the necessary investment levels will emerge to maintain Venezuela's current production capacity. A continuation of the status quo would see Venezuela struggle to supply its current market share and could result in production levels falling to a new low of 2.5 million b/d by 2008."

Non-OPEC output declines
Despite significantly higher market prices during the first 6 months of 2003, several nations outside of OPEC have watched their oil production fall below year-ago levels, especially in mature producing areas, Horsnell noted. In May, he said, oil production in the UK was 342,000 b/d below the same period in 2002, while Norway's output was down by 174,000 b/d.

"The UK, Norway, and the US normally make up about two-thirds of the total (Organization for Economic Cooperation and Development members') oil production and around 30% of total non-OPEC production. Given that, when their combined output falls by 801,000 b/d, as happened in May, it does leave something of a hill for the rest of non-OPEC to climb," said Horsnell.

"Non-OPEC production continues to be buoyed by Russia alone," he said. "Outside Russia, non-OPEC output fell in the fist half of this year." However, Russia's growth was not so much a result of higher oil prices as "due to industrial reorganization, fixing holes, applying technology, clarifying ownership issues with the central government, and becoming more efficient," said Horsnell.

"We can pretty much abandon the theory that it is absolutely inevitable that higher prices produce a strong output response that will in itself bring prices crashing down," he said. "The dynamics of non-OPEC production have changed as it has become more mature. Decline rates have advanced, and maintenance has become more complex, takes longer, and thus causes greater production losses.

"In short, non-OPEC as a whole has to continually work harder to compensate for the dynamics of the mature areas," said Horsnell. "The advance of decline rates does perhaps need to be factored more into market outlooks."

Natural gas crisis
NPRA officials warned Thursday that government policy makers and other stakeholders must "act now or accept responsibility" for a shortage of US natural gas supplies. "There is no OPEC to blame for this natural gas supply crisis," they said. "The US has an abundant supply of domestic gas. Flawed government policies prohibit its development in many areas."

The group acknowledged there are no quick-fix methods of boosting gas supplies to meet a growing US demand. However, they said, "We must develop policies that promote continued environmental progress without reducing the supply of natural gas and other petroleum products needed for a healthy economy and the nation's security." That must include "increased access and development opportunities to onshore public lands as well as those on the Outer Continental Shelf."

Alaskan natural gas should be brought to market in the Lower 48 "as soon as possible," they said.

Contact Sam Fletcher at [email protected]