MARKET WATCH: Crude price climbs above $144/bbl

Crude prices hit new record highs July 2 and continued climbing in after-hours electronic trading after the Department of Energy reported a larger-than-expected fall in crude inventories.

Sam Fletcher
Senior Writer

HOUSTON, July 2 -- Crude prices hit new record highs July 2 and continued climbing in after-hours electronic trading after the Department of Energy reported a larger-than-expected fall in crude inventories.

"Oil continued its bullish trajectory, with two data points helping to drive crude above the $144/bbl mark for the first time. News that the European Central Bank is set to raise its benchmark rate (confirmed this morning) sent US investors looking for a hedge against the weakening US dollar. In addition, DOE reported that crude inventories fell for the sixth time in the last 7 weeks," said analysts in the Houston office of Raymond James & Associates Inc.

The same government report showed that an increase in refining activity to 89.2% of capacity continued to build gasoline supplies as demand declined just prior the July 4 US Independence holiday, which usually is a peak demand period. The DOE's Energy Information Administration reported commercial US crude inventories fell 2 million bbl to 299.8 million bbl in the week ended June 27, the lowest level since January and exceeding the Wall Street consensus of a 400,000 bbl draw. Gasoline stocks escalated by 2.1 million bbl to 210.9 million bbl in the same week. Distillate fuel inventories grew by 1.3 million bbl to 120.7 million bbl (OGJ Online, July 2, 2008).

Refining margins are under pressure and are being sustained "only by heating oil" with the crack for the August contract for reformulated blend stock for oxygenate blending (RBOB) trading below $5/bbl, said Olivier Jakob at Petromatrix, Zug, Switzerland. "With processing margins low and even worse in the back months of 2008, refineries are not volunteering to build up crude stocks at $140/bbl while they have to plan for lower operating rates and are keeping instead to a minimum of crude inventory," he said.

Moreover, the higher heating oil crack is triggering a continued shift in the configuration of refinery yields. "US refinery runs were in June at par to last year but distillate production was 500,000 b/d higher, while gasoline production was 350,000 b/d lower. With the change of yields and the lack of gasoline demand, US refineries do not need to run higher levels of crude oil to produce the increased distillates going to the export market," said Jakob.

Meanwhile, he said, oil markets "have set themselves for another Trichet trade today." The front-month crude contract jumped by more than $5/bbl June 5 when Jean-Claude Trichet, president of the European Central Bank, said the bank might raise its interest rates (OGJ Online, June 5, 2008). Now, Jakob said, "The euro is back towards $1.59 and crude oil is higher in anticipation of Trichet providing an interest rate hike."

He said, "Fundamentally we have passed the point of oil demand destruction, so a further fall in the dollar engineered by the European Central Bank will do little to create additional demand that would warrant buying oil for that reason." A rate increase by the European bank would provide an "easy excuse to bid up oil again, but that factor may be "partly priced-in already," said Jakob.

Several industry observers expect crude prices to reach much higher levels this year. Russian President Dmitry Medvedev recently told reporters he expects oil to hit $150/bbl, creating "problems for the world's economy." by slowing growth.

Earlier this week, Nariman Behravesh, chief economist at Global Insight Inc. in Waltham, Me., said crude prices will probably hit $160/bbl by December and remain high through the middle of 2009 before falling as global demand eases. "First, and foremost, the growth in both real gross domestic product and energy demand in emerging markets is likely to remain strong for some time. Stimulative macroeconomic policies—especially monetary policies—are the principal reason for sustained robust growth in the emerging world.

"At the same time," Behravesh added, "fuel subsidies are weakening the incentives to conserve energy and [are] keeping energy demand strong. While some countries are beginning to tighten monetary policy and some are cutting fuel subsidies, these moves have been modest and are unlikely to have any significant impact until late 2009 or 2010. In the meantime, strong energy demand growth in emerging markets will outstrip additions to non-OPEC supply and will offset the declines in demand that have already occurred in the US and Europe," he said.

Global Insight raised its estimated peak price for West Texas Intermediate to $160/bbl from $124/bbl previously. "Prices will remain high through mid-2009 and then retreat as demand growth slows. The WTI price drops to $130/bbl by the end of 2009 (compared with $111/bbl in the prior forecast) and $105/bbl by the end of 2010 (unchanged). Geopolitical events, such as conflict between Israel and Iran and more supply disruptions by rebels in Nigeria, could easily push prices even higher," Behravesh said.

In other news, coal futures prices that previously had been rising steadily with oil plummeted by 10% in July 2 trading. Meanwhile, oil producers in the Middle East are importing coal to fuel much of their energy needs, freeing more crude for export at record prices. At today's prices, it's cheaper for Middle East countries to import coal from Australia to fuel power plants, rather than consume locally produced oil and gas.

Energy prices
The August contract for benchmark US sweet, light crudes closed at a record $143.57/bbl, up $2.60 for the day after hitting a record $144.32/bbl in intraday trade July 2 on the New York Mercantile Exchange. The September contract increased $2.56 to $144.14/bbl. On the US spot market, WTI at Cushing, Okla., was up $2.60 to $143.57/bbl. The August heating oil contract gained 12.8¢ to $4.07/gal on NYMEX.
The August RBOB contract increased 3.6¢ to $3.55/gal.

Natural gas for August delivery dropped 11.6¢ to $13.39/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., inched up 1¢ to $13.28/MMbtu. "The recent unpredictability of energy futures markets was on display yet again Wednesday as crude and natural gas broke ranks to explore different price directions," said analysts at Pritchard Capital Partners LLC, New Orleans. "While jockeying to get their books in order ahead of the extended holiday weekend, natural gas traders were also forced to digest contrasting temperature forecasts for the next 2 weeks, a 'well defined' tropical wave off West Africa, and expectations for a larger-than-normal storage injection report," they said.

The EIA reported July 3 the injection of 85 bcf of natural gas into US underground storage in the week ended June 27. That put the inventory of working gas slightly over 2.1 tcf. That's 381 bcf less than in the same period last year and 57 bcf below the 5-year average.

In London, the August IPE contract for North Sea Brent crude gained $3.59 to $144.26/bbl. "With WTI trading below Brent, the US is not pricing to pull crude oil in," Jakob said. The July gas oil contract increased $11.75 to $1,288.50/tonne.

The average price for the Organization of Petroleum Exporting Countries' basket of 13 reference crudes was up 79¢ to $137.73/bbl on July 2.

Contact Sam Fletcher at samf@ogjonline.com

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