MARKET WATCHOil futures price hits 2-week high on reports of refinery, pipeline problems

Sam Fletcher
Senior Writer
HOUSTON, Apr.16 -- Energy futures prices climbed Tuesday to a 2-week high for crude, strengthened by reports of a leak in a Canada-US crude pipeline in Minnesota and a power outage at a Texas refinery.

A power outage triggered the shutdown of most units at Motiva Enterprises LLC's 245,000 b/d refinery in Port Arthur, Tex., late Monday. Company officials said the refinery was in the process of restarting Tuesday and was expected to be at normal capacity Wednesday.

Officials at Calgary-based Enbridge Inc. said crews isolated a leak in its pipeline near Clearwater, Minn. Flow of oil through that pipeline is expected to resume soon, said company officials.

With US inventories of oil and petroleum products still at low levels, any disruption of the supply system provokes market reaction that is often beyond its actual impact, analysts said. Meanwhile, traders continued to speculate as to when Iraq might resume crude exports and the possible outcome of the special meeting of ministers of the Organization of Petroleum Exporting Countries, scheduled Apr. 24 in Vienna.

US supply and demand
The American Petroleum Institute said Wednesday that crude production from the Lower 48 topped 4.8 million b/d during March, down 1.5% from a year ago. Alaska produced a little more than 1 million b/d, down 1.7% from last year.

Crude imports into the US jumped to an average 9.039 million b/d during March, up 4.5% from the same period a year ago, for the second highest March import volume on record. That happened "despite fears of foreign supply disruptions and an actual easing of supplies toward the end of March," said API officials. With refined products included, US imports during March totaled 11.8 million b/d, up 7.3% from the same period last year. US gasoline imports increased by 14% in March, API officials said.

US demand for petroleum products increased in March by 4.1% from the same period a year ago. However, API officials said US demand for gasoline showed a weak increase of 0.6% in the same period. They blamed a 38% increase in gasoline retail prices from last year and a still weak US economy.

The US Energy Information Administration (EIA) reported US retail prices for regular gasoline averaged $1.59/gal in mid-April, down from a mid-March peak of $1.73/gal.

The American Automobile Association said Tuesday that the nationwide average retail price for regular gasoline at self-serve outlets was down to $1.60/gal at mid-April, compared with average prices of $1.72/gal in mid-March and $1.42/gal at mid-April 2002. The March-April retreat of US gasoline pump prices reflected "a significant decline in crude oil prices—nearly 25%—since the start of Operation Iraqi Freedom," said AAA officials.

"The end of the major hostilities in Iraq and the recent downward trend in gasoline prices will increase consumer interest in planning late-spring and summer driving vacations," said Dawn Duffy, AAA spokesperson. "Whether prices will stabilize near their current levels or move lower is yet to be seen; however, these lower prices should help motorists feel better when making their weekly trip to the fuel pumps."

New York market
The May contract for benchmark US light, sweet crudes gained 66¢ to $29.29/bbl Tuesday on the New York Mercantile Exchange, the highest finish in 2 weeks, while the June position advanced 47¢ to $27.53/bbl. Heating oil for May delivery jumped 2.51¢ to 77.26¢/gal. Unleaded gasoline for the same month was up 0.97¢ to 85.88¢/gal.

The May natural gas contract increased by 10.1¢ to $5.65/Mcf Tuesday on NYMEX. "Some of the buying was triggered by cooler late-week forecasts and the expectation that the EIA will report another withdrawal from storage this week," said analysts Wednesday at Enerfax Daily.

"Despite this week's rally and concerns about sagging production levels and near record low storage, some traders expect a lagging cash market, still more than 15¢(/Mcf) below NYMEX, to limit the upside until storage operators pick up the pace of injections and warmer temperatures boost cooling demand," they said.

A contrary view
Meanwhile, officials at Wood Mackenzie, Edinburgh, predicted Wednesday that US natural gas prices in the second half of this year will fall below the current NYMEX strip for the third quarter, as markets are lost to lower-priced fuel oil.

"Wood Mackenzie predicts gas consistently pricing higher than residual fuel oil by $1.25-1.50/MMbtu, the highest-ever summer natural gas premium to oil. This premium will drive significant demand responses from the power market," the company said in a news release.

That view "runs counter to most domestic market forecasters currently predicting a bull run for gas through the summer and into the peak winter season," the company acknowledged.

"We don't underestimate the size of the problem; throughout late spring and early summer, storage must build back up to an acceptable minimum level. That means injecting an extra 2.5 bcfd of natural gas on top of last year's injection demand, at a time with North American supply is tight at 74 bcfd," said Jen Snyder, head of North American gas research at Wood Mackenzie.

"However," Snyder said, "downward pressure on price will come in (the third quarter) as a post-war oil price stabilizes in the mid-to-low $20/bbl range and as generators use their flexibility to switch to residual or distillate fuel oil and away from burning natural gas."

London market
In London, the May contract for North Sea Brent crude gained 21¢ to $25.20/bbl Tuesday on the International Petroleum Exchange. Brokers said they expect near-term futures prices to hover around $25/bbl.

The May natural gas contract increased by 3.2¢ to the equivalent of $2.56/Mcf on IPE.

The average price for OPEC's basket of seven benchmark crudes gained 21¢ to $25.56/bbl Tuesday.

Contact Sam Fletcher at [email protected]