MARKET WATCH: Low inventory escalates energy prices

The price of oil shot past $134/bbl May 21 after the Department of Energy reported a surprise drop in US crude inventories, the first decline in 5 weeks.

Sam Fletcher
Senior Writer

HOUSTON, May 22 -- The price of oil shot past $134/bbl May 21 after the Department of Energy reported a surprise drop in US crude inventories, the first decline in 5 weeks.

The new front-month July contract continued climbing overnight via electronic trading and topped $135/bbl in early trading May 22 on the New York market.

DOE's Energy Information Administration reported that commercial inventories of benchmark US light, sweet crudes fell 5.4 million bbl to 320.4 million bbl in the week ended May 16. The consensus among Wall Street analysts was for a 500,000 bbl increase. Crude supplies had climbed more than 12 million bbl in the prior 4 weeks.

Gasoline stocks declined 800,000 bbl to 209.4 million bbl last week, vs. expectations of a 300,000 bbl build. Distillate fuel inventories gained 700,000 bbl to 107.8 million bbl, just half the increase anticipated by analysts. Imports of crude into the US dropped 696,000 b/d to 9.2 million b/d in that same period. Input of crude into the US refining system inched up by 29,000 b/d to 15.1 million b/d, with refineries operating at 87.9% of capacity (OGJ Online, May 21, 2008).

"With the oil bear going the way of the [extinct] Dodo bird, bulls continue to dominate the show," said analysts in the Houston office of Raymond James & Associates Inc.
"The [EIA] inventory report sparked a strong run in crude prices, breaking through the $134/bbl level for first time and closing up 3.3% on the trading session." Meanwhile, they said, "The International Energy Agency is helping to keep the party going by announcing renewed skepticism about long-term oil supply."

The IEA is attempting an independent assessment of the world's 400 largest oil fields by November, although some of the major players such as Saudi Arabia, Iran, and Russia are reluctant to divulge information. But already IEA is indicating that crude supplies may be tighter than currently projected, especially in coming years. The Paris-based agency indicated a likely shortfall of 12.5 million b/d between capacity additions and incremental demand by 2015. "All in all, the focus on a lack of supply 3-4 years down the road may have spurred the futures markets, as oil recently fell back into contango for the first time since mid-2007," said Raymond James analysts.

Meanwhile, there already is a global shortage of diesel fuel, analysts say. In the wake of the severe earthquake in China, that country's demand for diesel for electricity generation has escalated sharply, boosting energy prices.

Olivier Jakob at Petromatrix, Zug, Switzerland, noted, "The stock draws in the weekly DOE statistics and a sharp fall in the dollar were not the kind of data that were required to cap an oil market under renewed positive momentum." Less than a week ago Goldman Sachs Group Inc. forecast crude prices could escalate to $150-200/bbl within 2 years (OGJ Online, May 6, 2008). Now crude futures prices are rising "so fast that under the current volatility that goal could already be reached within the end of the week," Jakob said.

Benchmark US crude is now priced "34% higher than at the start of April, and the acceleration does create a few issues," Jakob said. "By pricing in the perceived multi-year supply and demand, the futures markets are forcing a multi-year inflation to be priced in one go, leaving no time for the economy to go through its natural growth and adjustment cycle." Furthermore, he said, "The emerging countries that have been recently reducing price subsidies will not see an improvement in their balances and will be in the same dire situation [as] 3 months ago."

Energy prices
The July crude contract hit yet another intraday high of $134.15/bbl May 21 on the New York Mercantile Exchange, before closing at a record $133.17/bbl, up $4.19 for the day. August crude jumped by $4.29 to $133.54/bbl. On the US spot market, West Texas Intermediate was up $3.70 to $132.78/bbl. The June contract for reformulated blend stock for oxygenate blending (RBOB) climbed by 9.21¢ to $3.40/gal on NYMEX. Heating oil for the same month escalated 13.34¢ to $3.91/gal.

The June natural gas contract jumped 27.5¢ to $11.64/MMbtu on NYMEX. On the US spot market, however, gas at Henry Hub, La., lost 85.5¢ to $10.15/MMbtu. EIA reported the injection of 85 bcf of natural gas into US underground storage during the week ended May 16. Working gas in storage now exceeds 1.6 tcf, up 85 bcf from year-ago levels and just 3 bcf below the 5-year average.

In London, the July IPE contract for North Sea Brent crude shot up $4.86 to $132.70/bbl. The June gas oil contract gained $23 to $1,253.50/tonne.

The Vienna office of the Organization of Petroleum Exporting Countries was closed for a public holiday May 22, so no update of the average price for its basket of 13 reference crudes was available.

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