MARKET WATCH: Oil prices rise, demand declines

After trading lower in the morning session on June 18, the front-month crude contract rebounded to a higher closing, breaking a 3-day losing streak.

Sam Fletcher
Senior Writer

HOUSTON, June 19 -- After trading lower in the morning session on June 18, the front-month crude contract rebounded to a higher closing, breaking a 3-day losing streak.

"Several things contributed to the price rebound," said analysts in the Houston office of Raymond James & Associates Inc. At the top of their list was the Energy Information Administration's latest report that US crude inventories fell for the fifth consecutive week (OGJ Online, June 18, 2008). They also cited President George W. Bush's statement that he expects no pledges of additional crude production at the scheduled weekend meeting of oil producers and consumers in Saudi Arabia.

Traders also feared a possible reduction of Nigeria's crude exports as negotiations between a Chevron Corp. subsidiary and union leaders dragged on. However, Nigeria's oil minister said he persuaded Chevron to remove 70 expatriates from its workforce. The number of expatriate workers employed by the company was a primary issue with the union.

Royal Dutch Shell PLC was forced to shut in 220,000 b/d of crude production at its deepwater Bonga oil field 120 km off Nigeria when two dozen gunmen in speedboats attacked a floating production, storage, and offloading vessel on June 19.

Meanwhile, Olivier Jakob at Petromatrix, Zug, Switzerland, noted the latest EIA data show US inventories remained unchanged overall for the fourth consecutive week "as crude oil stock draws continue to be transformed in product stock build." The recent increase of crude imports along the US Gulf Coast "confirm that the low number of last week was related to the shutting down of Mexican ports at the start of the month due to Tropical Storm Arthur," Jakob said.

Gulf Coast imports of crude recently hit a 12-month high, "but are lower by 420,000 b/d on a 4-week average vs. last year, said Jakob, adding, "Days of cover remain in the norm on products but lower than normal on crude oil. The question now remains to see how long US refiners can continue to run without creating a stronger correction in the heating oil crack and the overall processing margin."

Prices cut demand
The latest Federal Highway Administration traffic volume report said mileage traveled on all US roads and streets during April was at the lowest level for that month since 2003. April mileage declined 1.8% from the same period in both 2007 and 2006. So far this year, US traffic volume is down 2.1% from 2007 and 2.8% from 2006. The biggest regional decline was in the West, down 2.8% in April from the same month in 2007.

Jakob at Petromatrix said, "For now gasoline demand in the US is negatively impacted by a change in driving habits (lower miles-traveled), and a second wave of demand reduction should be expected into next year as data from car manufacturers is showing that the existing fleet is gradually replaced by vehicles with an higher fuel efficiency."

In a report issued June 19, Cambridge Energy Research Associates, part of IHS Inc., said US gasoline demand will likely decline in 2008 for the first time in 17 years. "If petroleum prices stay at or near their current levels, 2007 could prove to have been the peak year for US gasoline demand," CERA said.

"Americans are now driving less and demanding greater fuel efficiency from their vehicles when they do drive," said Aaron Brady, CERA director, global oil. "Automakers are responding by accelerating the shift in their model mix. Both short- and long-term signals are all pointing toward decreasing future demand."

Retail gasoline prices in the US are already at the highest level ever, even when adjusted for inflation. Because of increases in real income over the past 30 years, however, pump prices are not yet pinching pocketbooks as much as during the last oil boom in the late 1970s, early 1980s. However, CERA estimates that "pain point" will be hit if the annual average retail price for gasoline hits $4.20/gal.

Long -term shifts in consumer behavior in response to higher gasoline prices started more than 2 years ago. "Growth in total vehicle miles traveled by American drivers slowed substantially in 2005 and 2006 and is now trending downward for the first time since the oil shocks of the 1970s and 1980s," CERA reported. "US vehicle sales have been decreasing since mid-2005, and sales of light trucks—which tend to get fewer miles per gallon—have dropped significantly. Light truck sales (a category which includes sports utility vehicles) are now less than half of total light vehicle sales for the first time since 2001."

Energy prices
The July contract for benchmark US sweet, light cruces climbed by $2.67 to $136.68/bbl June 18 on the New York Mercantile Exchange. The August contract gained $2.64 to $137.17/bbl. On the US spot market, West Texas Intermediate at Cushing, Okla., was up $2.67 to $136.68/bbl. The July heating oil contact advanced by 3.78¢ to $3.86/gal on NYMEX. The July contract for reformulated blend stock for oxygenate blending (RBOB) gained 4.88¢ to $3.47/gal.

The July natural gas contract set a new intraday record of $13.29/MMbtu before closing at $13.21/MMbtu, up 25.8¢ for the day on NYMEX. On the US spot market, gas at Henry Hub, La., advanced 11.5¢ to $12.94/MMbtu. Analysts at Pritchard Capital Partners LLC, New Orleans, said, "Current [gas] market strength is impressive given the lackluster near-term weather outlook."

EIA reported the injection of 57 bcf of natural gas into US underground storage in the week ended June 13. Working gas in storage is now at 1.9 tcf, 376 bcf less than a year ago at the same time and 52 bcf below the 5-year average.

In London, the August IPE contract for North Sea Brent crude increased by $2.72 to $136.44/bbl. However, the July gas oil contract fell $25.50 to $1,212.25/tonne.

The average price for the Organization of Petroleum Exporting Countries' basket of 13 reference crudes was down 53¢ to $128.45/bbl on June 19.

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