MARKET WATCHEnergy futures prices rebound with reported drop in US oil stocks

Sam Fletcher
Senior Writer

HOUSTON, May 8 -- Energy futures prices rebounded Wednesday in response to unexpectedly bullish reports of a fall in US oil inventories instead of a large build as traders had expected.

The US Energy Information Administration said US crude stocks declined by 800,000 bbl to 287.2 million bbl during the week ended May 2. The American Petroleum Institute reported a fall of 2.4 million bbl to 286.2 million bbl for the same period. API said US gasoline stocks increased by 1.5 million bbl to 208.2 million bbl and that distillates were up 1.1 million bbl to 97.6 million bbl. EIA pegged the rise in gasoline stocks at 2.2 million bbl to 207.8 million bbl, with distillates increasing by 1.4 million bbl to 97.3 million bbl.

Conflicting outlooks
"The US crude oil fair value held its own this week. Following last week's (reports of a) large build in gasoline, we saw another (reported) increase in product inventories, this time in gasoline and distillate, said Tyler Dann, Houston-based analyst with Banc of America Securities, Thursday. He sees a "short-term bearish trend for refined products in particular."

He said, "We expect that (the Organization of Petroleum Exporting Countries) will continue to have a difficult time supporting crude prices as Iraq comes back online in a seasonally low demand environment with fundamentals generally weakening, as evidenced this week by the (reported) increases in light product inventories in the US."

However, Paul Horsnell at J.P. Morgan Securities Inc. in London claimed, "The numbers may not look like it at first glance, but they are extremely bullish data when compared with normal seasonal patterns. The problem is that total oil inventories have fallen at a time when they should be showing a rapid seasonal rise."

EIA reported total US commercial inventories declined by 700,000 bbl to 905.2 million bbl during the week ended May 2. But that, said Horsnell, "is a fall of 6.8 million bbl (nearly 1 million b/d) relative to the 5-year average. As a result, the deficit from the 5-year average has shot back up to 92 million bbl, meaning that all of the headroom gained by the inventory builds of 2 weeks ago has now been eroded."

Furthermore, he said, "Tightness is continuing to move out of crude oil and into oil products. Within oil products, only the gasoline figures are looking better. However, 1.8 million bbl of this week's 2.2 million bbl build occurred on the West Coast, an isolated market in terms of oil market logistics, and is thus less than exciting."

Horsnell said, "The market has been expecting large crude oil inventory builds over the last 2 weeks and has been disappointed. Imports are still running at high levels but are only enough to prevent the sharp acceleration in crude oil usage in refineries from pushing inventories further down."

As for when Iraq will resume oil exports, Horsnell said that question "will keep a large number of international lawyers very busy over the coming weeks.

Meanwhile, US Sec. of State Colin Powell said a new resolution to lift trade sanctions against Iraq would be presented this week to the United Nations Security Council, in a move that would give the UN a vital role in Iraq's reconstruction.

Energy prices
The June contract for benchmark US light, sweet crudes gained 51¢ to $26.23/bbl Wednesday on the New York Mercantile Exchange, while the July position advanced by 50¢ to $26.12/bbl. Heating oil for June delivery jumped by 1.15¢ to 68.93¢/gal. Unleaded gasoline for the same month increased by 1.11¢ to 77.96¢/gal.

The June natural gas contract rose 9.2¢ to $5.66/Mcf on NYMEX in a technical rally. "The futures market also held above the physical market, which has continued strong because of nuclear and electric generating plant maintenance turnarounds and problems, but slipped lower (Wednesday)," said analysts at Enerfax Daily. "Producers who had put on hedges are now seen dismantling them and buying back more shorts, thereby helping the market move upward," they said.

Meanwhile, the EIA reported Thursday the injection of 80 bcf of natural gas into US underground storage during the week ended May 2. That's up from injunctions of 57 bcf the previous week and 39 bcf during the same period last year. US underground natural
gas storage now stands at 821bcf, down 824 bcf from the same period last year and 545 bcf below the 5-year average.

In London, the June contract for North Sea Brent oil gained 54¢ to $24.11/bbl on the International Petroleum Exchange. However, the June natural gas contract lost 0.98¢ to the equivalent of $2.58/Mcf on IPE.

The average price for OPEC's basket of seven benchmark crudes dipped 3¢ to $23.89/Mcf Wednesday.

Contact Sam Fletcher at [email protected]