MARKET WATCHEnergy futures prices rally with decline in US oil inventory

Sam Fletcher
Senior Writer

HOUSTON, May 9 -- Energy futures prices continued to rally Thursday in reaction to a significant decline in US oil inventories during the week ended May 2, instead of the build expected by most traders.

However, several key Asia countries built up emergency stocks of as much as 175 million bbl of crude and petroleum products prior to the US-led coalition war with Iraq, which they may soon begin drawing down, said analysts Friday at Energy Market Consultants Inc. (EMC).

Excess stocks released
The India oil ministry recently announced that it will allow refiners to reduce their pre-war inventories. "Refiners had been requested to raise stocks to 45 days supply for products and 30 days for crude—in total, about double normal levels of stocks held by Indian refiners in the past," EMC reported.

They said the Philippines government also relaxed temporary prewar minimum stock requirements that caused inventory levels in that country to hit a 10-year high in early April.

Unlike other areas, EMC said, "It appears there is potential for a big drawdown in commercial stocks in the Asia-Pacific region in the near future." The potential may be even bigger in China "where oil demand is said to have slumped recently due to impact of the SARS (severe acute respiratory syndrome) virus."

There is no evidence yet that Asia-Pacific has started to reduce those excess stocks, EMC said. It said the timing of any potential drawdown of that surplus likely will be linked to the return of Iraqi oil exports to world markets. Refiners may be reluctant to abandon oil purchases if prices are depressed by surplus supply.

However, EMC sees potential support for oil prices over the longer term because of plans for building strategic stocks in South Korea, Taiwan, India, and China—"possibly up to 200,000 b/d through 2005." It said commercial stocks of oil and petroleum products in Japan and South Korea have fallen to relative low levels in recent months, possibly as a result of the large strategic stockpiles maintained in both countries.

Moreover, with new members of the European Union required to build minimum 90-day emergency oil reserves and the US looking at possible expansion of its strategic petroleum reserve, such builds may total as much as 500,000 b/d "over the next few years, said EMC.

Market prices
The June contract for benchmark US light, sweet crudes gained 75¢ to $26.98/bbl Thursday on the New York Mercantile Exchange, while the July contract advanced 63¢ to $26.75/bbl. Unleaded gasoline for June delivery jumped 2.88¢ to 80.84¢/gal on reports of tighter US supplies of oil and gasoline early in the peak summer driving season. Heating oil for the same season increased 2.04¢ to 70.97¢/gal.

The June natural gas contract gained 11.2¢ to $5.77/Mcf on NYMEX on forecasts of warmer weather, despite a bearish report Thursday by the US Energy Information Administration that 80 bcf of gas was injected into US underground storage during the week ended May 3. That was the largest injection so far this season, up from 57 bcf the previous week and 39 bcf a year ago, said Robert S. Morris at Banc of America Securities, New York.

"The rally was tied to warmer weather forecast next week that heightened market concerns about the growing competition for limited supplies," said analysts Friday at Enerfax Daily.

National gas supplies now stand at 821 bcf, up from an all-time low of 623 bcf in the week ended Apr. 11. However, current supplies are still well below the 1.6 tcf of gas that was in storage at this time last year and the prior 5-year average of 1.4 tcf, said Ronald Barone at UBS Warburg LLC, New York.

At current levels, he said, the industry will need to inject gas at a continued rate of 12 bcfd to reach the 3 tcf storage "comfort level" by Nov. 1. That's up significantly from last year's average injection rate of 8.2 bcfd and an average rate of 9.6 bcf over the last 9 years "when deliverability was higher and underlying demand was lower," said Barone.

"Meanwhile, domestic natural as production continues to be augmented," with gas processors stripping out less natural gas, "as it is currently more economic for operators to leave the associated (British thermal units) in the natural gas stream," Morris said. "The decision to reject (leave in) or extract ethane from gas from the natural gas stream is based primarily on pricing differentials, including transportation and processing costs, although processing rights and contract terms are also important factors," he said.

In London, the June contract for North Sea Brent oil gained 54¢ to $24.65/bbl Thursday on the International Petroleum Exchange. The June natural gas contract increased by 3.1¢ to the equivalent of $2.61/Mcf on IPE.

The average price for the Organization of Petroleum Exporting Countries' basket of seven benchmark crudes increased by 55¢ to $24.44/bbl Thursday.

Contact Sam Fletcher at [email protected]