MARKET WATCHEnergy prices rise on weak build of US oil inventories

Sam Fletcher
Senior Writer

HOUSTON, May 1 -- Oil futures prices rallied Wednesday, ending a 6-session losing streak on the New York Mercantile Exchange, as tracking agencies reported a weaker-than-expected build in US crude inventories for the previous week and officials of the Organization of Petroleum Exporting Countries expressed concern about the drop in markets since that group took steps last week to curtail overproduction.

That price jump illustrates that "the widespread reaction that oil prices must now be due for a major collapse because OPEC was not cutting enough is incorrect," said Paul Horsnell, head of energy research for JP Morgan Chase & Co., London.

The US Department of Energy reported Wednesday that US inventories of oil increased by only 1.8 million bbl to 288 million bbl for the week ended Apr. 25. Gasoline stocks increased by 4.4 million bbl to 205.6 million bbl during the same period, while US distillate stocks declined by 200,000 bbl to 95.9 million bbl, The American Petroleum Institute reported US crude inventories increased by 1.2 million bbl to 288.6 million bbl in the week ended Apr. 25, with gasoline stocks up 3.9 million bbl to 206.7 million. API said US distillate stocks increased by 196,000 bbl to 96.5 million bbl.

Disappearing "bulge"?
"We are now getting close to the point where the bulge in imports to the US will begin to disappear, constricting the flow in the following weeks," said Horsnell. "The issue with crude oil is not that inventories have built, but rather that they have not built by more, given that the time available to gain more headroom is beginning to run out."

In a weekly report Thursday, Horsnell said, "The path of OPEC production (during) March makes the mathematics of the (group's) decision to go to a 25.4 million b/d (production) schedule (in) June easier to understand,"

He said, "Over the first 2 weeks of March, Iraq was still exporting, and replacement supplies were already ramping up" in advance of the anticipated US-led invasion of Iraq. "At points over that period, we suspect that OPEC production may have passed through 29 million b/d and perhaps averaged around 28.8 million b/d," he said.

However, Horsnell said, "In the second half of March, Iraqi loadings stopped, and Nigerian supplies were curtailed" by civil unrest. "At this point, OPEC production may have been a little shy of 26 million b/d, and the volume may not have crept much higher since then," he said.

"Recent arrivals of crude oil to the US reflect loadings before Iraq stopped exporting, i.e., the high water mark for OPEC production," said Horsnell. "Further down the delivery chain, tankers in transit represent a period of loadings when OPEC production was 3 million b/d lower than the high point, and that reduction has yet to feed through into the inventory data."

Price pessimism unwarranted
Widespread pessimism that oil prices may fall to $19-20/bbl within a few months as Iraq resumes oil production and exports while other OPEC members increase their production "reflects a general lack of understanding" about the group's ability "to administer a price band with $25(/bbl) as a rough center-point," said two analysts with Merrill Lynch Global Securities Research & Economics Group in a separate report Thursday.

Almost all forecasts of world demand for OPEC crude during 2003 are at too-low levels, said Michael Rothman, senior energy market specialist, and Steven A. Pfeifer, senior integrated oils analyst, with Merrill Lynch in New York.

"We estimate that OPEC needs to produce a wee under 25.5 million b/d in the current quarter to allow for a normal, seasonal stock build of about 1 million b/d," they reported. "At that level of production, however, inventories would still end the quarter 125 million bbl below normal."

The Merrill Lynch officials said even their forecast of world demand for OPEC oil is conservatively low since it does not factor in three features of "hidden demand." These include:

-- The need to rebuild low commercial oil inventories, which alone would add 460,000 b/d to demand, they said.

-- Scheduled delivery of oil into the US Strategic Petroleum Reserve that would increase the OPEC supply-drain by 110,000 b/d in the second quarter and double that amount in the third.

-- As much as 350,000 b/d of incremental demand for residual and distillate fuels as consumers switch to those cheaper fuels from more expensive natural gas.

Energy prices
The June contract for benchmark US sweet, light crudes jumped 56¢ to $25.80/bbl Wednesday on NYMEX, while the July position gained 35¢ to $25.46/bbl. Heating oil for May delivery escalated by 3.1¢ to 76.14¢/gal. Unleaded gasoline for the same month was up 1.34¢ to 84.28¢/gal.

"There's still intense pressure on heating oil and diesel supplies in New York harbor, related largely to the very low stock situation, as evidenced by the meteoric price spread between the harbor and the US Gulf (Coast)," said Rothman and Pfeifer. "The spread is running at about 15¢/gal, as compared with the typical spread of about 2.5¢/gal."

The June natural gas contract gained 14.9¢ to $5.39/Mcf on NYMEX "as new buyers entered what has been a technically oversold market," analysts said Thursday at Enerfax Daily. "Prices seem to be range-bound between $5-6(/Mcf), with any movement below $5(/Mcf) not lasting because people buy it to put into storage."

The US Energy Information Administration reported Thursday that 57 bcf of gas was injected into US underground storage during the week ended Apr. 25. That compares with injections of 61 bcf the previous week and 31 bcf during the same period a year ago. US gas storage now stands at 741 bcf, down 865 bcf from year-ago levels and 563 bcf below the 5-year average.

In London, the June contract for North Sea Brent oil gained 42¢ to $23.68/Mcf on the International Petroleum Exchange. The June natural gas contract inched up 0.5¢ to the equivalent of $2.51/Mcf on IPE.

The OPEC headquarters in Vienna was closed for a holiday Thursday, so there was no report on the average price for OPEC's basket of benchmark crudes.

Contact Sam Fletcher at [email protected]