MARKET WATCHFalling US gasoline stocks push up energy futures prices

Sam Fletcher
Senior Writer

HOUSTON, May 30 -- Energy futures prices rallied Thursday on government and industry reports of a large drop in US gasoline inventories.

The US Energy Information Administration said Thursday that gasoline stocks fell by 3.4 million bbl to 205 million bbl during the week ended May 23. It said US distillate inventories dropped by 1.2 million bbl to 101.5 million bbl, while US crude stocks increased by 1.1 million bbl to 286.2 million bbl.

The American Petroleum Institute said US crude inventories jumped by a whopping 3.8 million bbl to 286.4 million bbl during that same period. It reported gasoline stocks were down 2.3 million bbl to 206.6 million bbl, with US distillate stocks declining by 905,000 bbl to 103.2 million bbl.

Market factors
"Gasoline inventories fell heavily in the last full week of data relating to the period before the traditional start of the US driving season," noted Paul Horsnell, an energy industry analyst with J.P. Morgan Securities Inc., London. The US driving season, with its peak demand for gasoline, officially starts with the long Memorial Day weekend, which was May 24-26. The weekly API and EIA reports were delayed by one day because of the holiday.

"Gasoline inventories should build through to the last week of June, and a fall at this point is not a healthy sign," said Horsnell. "Heating oil is not a major concern for the market yet, but it will be within 3 months, and so far inventories are not building as they should in the summer."

Combined US commercial inventories of crude oil and petroleum products totaled 912.7 million bbl last week, down "an awesome 101.8 million bbl" from the 5-year average at this period, said Horsnell.

Iraq outlook
Meanwhile, EIA reported Iraq is producing 700,000-800,000 b/d of oil but is putting 250,000-300,000 b/d of its output into storage. However, EIA quoted Philip Carroll, senior US advisor to Iraq's oil ministry, as predicting Iraq "should be exporting some 500,000 b/d by mid-June." EIA officials claimed Iraqi production will climb to 1 million b/d by the end of June.

Ali Ibrahim al-Naimi, Saudi Arabia's oil minister, was quoted as saying Iraq's oil production should be allowed to reach 3.5 million b/d before it is assigned an official production quota by the other members of the Organization of Petroleum Exporting Countries.

That, said Horsnell, "should throw another bucket of cold water on the recent excitement in some quarters that reincorporation of Iraq (as an active member) was going to cause an immediate problem for OPEC. In particular, the choice of 3.5 million b/d rather than 3 million b/d means that the issue of Iraqi quotas may not matter over the next 3 years or so, simply because Iraq is very unlikely to get close to that level over that period."

He said, "The Saudi statement also carries the implication that until the quota issue is triggered, the rest of OPEC will, as expected, withdraw from the margin enough to accommodate Iraq's exports. Iraq was producing above 2.5 million b/d as recently as February (and had been at or above that level for most of the last 5 years), and hence OPEC does not appear to have to reinvent the wheel in this regard."

Moreover, Horsnell said, "The looting of (industrial) infrastructure (in Iraq) does not seem to have lessened over the last week, and indeed the losses from oil and other key industries now appear to be extremely organized and targeted. This raises a major question. Is the pillaging simply the result of groups driven solely by commercial gain, or is there any suggestion of deliberate sabotage also being involved?"

If it's more than Iraqi citizens scavenging metal to sell for scrap, with some "more sinister element involved," he said, "then the potential for further targeting of the most sensitive elements of the oil system could create major difficulties in meeting proposed timelines for production and export growth."

In the interim, Horsnell said, "The slow-burning issue on the political agenda at the moment that has oil market implications is the US-Iran relationship. We would not expect the obvious ratcheting up of tensions to manifest itself in anything dramatic in the near future, but we do expect it to be a background factor and a source of occasional alarms in the market for quite some time to come."

New York prices
The July contract for benchmark US light, sweet crudes increased by 52¢ to $29.10/bbl Thursday on the New York Mercantile Exchange. The August position advanced by 44¢ to $28.09/bbl. Heating oil for June delivery jumped by 1.69¢ to 74.65¢/gal. Gasoline for the same month was up 1.65¢ to 86.15¢/gal.

The July natural gas contract gained 5¢ to $6.10/Mcf on NYMEX despite an EIA report Thursday that 95 bcf of gas, the largest amount so far this season, was injected into US underground storage during the week ended May 23. "The report ties the 1998 mark for the highest-ever injection," said analysts Friday at Enerfax Daily. "However, in 8 weeks of (the current) injection season, 442 bcf has been injected into storage, an average of only about 55 bcf/week."

Thursday's rise in gas futures prices resulted partly from the rally in oil prices, along with technical buying, traders buying commodities to close out short sales, and hedging by new commercials, analysts said. "Expectations are for larger natural gas storage builds over the next few weeks, particularly if temperatures remain moderate," they said.

Other prices
In London, the July contract for North Sea Brent oil increased by 44¢ to $26.03/bbl Thursday on the International Petroleum Exchange. The June natural gas contract inched up 0.5¢ to the equivalent of $2.70/Mcf on IPE.

However, the average price for OPEC's basket of seven benchmark crudes dipped by 22¢ to $26.27/bbl Thursday.

Speaking in Caracas, OPEC Sec. Gen. Alvaro Silva Calderon said OPEC members would be producing some 53 million b/d of oil, or 48% of the world's total consumption, by 2020.

Global oil consumption is expected to grow by 3%/year over the next 20 years, to 89 million b/d in 2010 and 107 million b/d in 2020 from an anticipated 77 million b/d in 2003. With 75% of the world's oil reserves, OPEC member countries will gain a greater share of the world market, while little growth in the production capacity of non-OPEC producers is foreseen over the next 2 decades, said Silva Calderon.

Since no alternative energy sources has highly developed technology capable of substituting for hydrocarbons, he said, "Current technologies can obtain from hydrocarbons those clean fuels that the environment requires and (that are) as environmentally friendly as desired."

He said OPEC is expected to be producing some 36 million b/d, or 40% of the world market, by 2010.

Contact Sam Fletcher at [email protected]