MARKET WATCH: Crude sets new price records

For the third time in as many sessions, the front-month benchmark crude contract climbed to new highs, topping $123/bbl May 7 in the New York market.

May 8th, 2008

Sam Fletcher
Senior Writer

HOUSTON, May 8 -- For the third time in as many sessions, the front-month benchmark crude contract climbed to new highs, topping $123/bbl May 7 in the New York market and led by strong increases in distillate fuel prices, including diesel.

Prior to that surge, crude prices had retreated after the Energy Information Administration said commercial inventories of benchmark US crudes increased by 5.7 million bbl to 325.6 million bbl in the week ended May 2. Gasoline stocks increased 800,000 bbl to 211.9 million bbl in the same period (OGJ Online, May 7, 2008).

But EIA also reported distillate fuel inventories decreased by 100,000 bbl to 105.7 million bbl. It also said that, due to spring maintenance and tight margins, US refinery utilization fell to 85% from 85.4% the prior week. Gasoline production decreased to 8.7 million b/d, while distillate fuel production remained unchanged at 4.2 million b/d.

Olivier Jakob at Petromatrix, Zug, Switzerland, said, "Overall US demand for products is weak so refiners are not running at capacity and crude stocks are building. Gasoline remains balanced by high imports (and close to record stocks in Europe). Heating oil is the only commodity showing a deficit in days of cover compared to previous years, but demand has been driven by outside markets."

Jakob said, "The decoupling of oil to the dollar in recent days (West Texas Intermediate is currently priced $20/bbl above its 200-day correlation to the dollar index) is something we feel is too easily discounted. What remains of oil demand growth is coming from outside the US and the combination of record gas oil price and a stronger dollar can not be a positive to world oil demand growth, especially as more emerging countries have hit the breaking point of not being able to afford anymore the internal [fuel] subsidies (Syria, Egypt, Indonesia over the past 10 days)."

Paul Horsnell, Barclays Capital Inc., London, said, "Crude inventories have built more than normal, compensated barrel-for-barrel by falls in product inventories relative to their 5-year averages. Demand indications continue to suggest a fairly strong rebound from the depths hit earlier in the year." He added, "There is no obstacle to prices continuing to test higher all along the curve. We are in a phase where price adjustments are being used to feel out what the true fundamentals are, and so far that operation has continued to point to higher prices." Therefore, Barclays Capital raised its forecast for the 2008 average price of West Texas Intermediate to $116.90/bbl, including an expected average of $126/bbl in the second half of this year.

Meanwhile, Abdalla Salem El-Badri, secretary general of the Organization of Petroleum Exporting Countries, issued a statement May 8 reiterating that the sharp rise in crude prices is mainly driven by financial market developments and the increased flow of speculative funds into oil futures. He said, "There is clearly no shortage of oil in the market. Organization for Economic Cooperation and Development commercial oil stocks remain above the 5-year average, with days of forward cover at a comfortable level of more than 53 days.

"US crude inventories, meanwhile, rose by almost 6 million bbl last week, which is a further indication that oil supplies are plentiful. OPEC member countries continue to produce at more than 32 million b/d. In addition, a number of new OPEC crude oil projects have started to come onstream and OPEC spare capacity continues to increase, with the figure currently standing above 3 million b/d. At the same time, crude oil movements indicate that some member countries are unable to find buyers for their additional supply," El-Badri said.

The average price for OPEC's basket of 13 reference crudes gained $1.28 to $116.03/bbl on May 7.

Energy prices
The June contract for benchmark US sweet, light crudes hit a new intraday high, topping out at $123.93/bbl May 7 before closing at a record $123.53/bbl, up $1.69 for the day on the New York Mercantile Exchange. The July contract increased $1.86 to $123.20/bbl. On the US spot market, WTI at Cushing, Okla., was up $1.68 to $123.53/bbl. The June contract for heating oil—the market's proxy for distillate fuels, including diesel—registered a record $3.46/gal in intraday trading prior to a record closing of $3.45/gal, up 9.38¢ for the day on NYMEX. The June contract for reformulated blend stock for oxygenate blending (RBOB) increased 1.27¢ to $3.12/gal.

The June natural gas contract climbed by 17.7¢ to $11.33/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., lost 4.5¢ to $11.08/MMbtu. EIA reported the injection of 65 bcf of natural gas into US underground storage during the week ended May 2, increasing the amount of working gas in storage to 1.44 tcf. That's 284 bcf less gas than was in storage at this time a year ago and 11 bcf below the 5-year average.

In London, the June IPE contract for North Sea Brent crude gained $2.01 to $122.32/bbl. The May gas oil contract jumped by $9 to a record $1,123.50/tone.

Contact Sam Fletcher at samf@ogjonline.com.

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