MARKET WATCHEnergy prices mixed on bullish demand data

Sam Fletcher
Senior Writer

HOUSTON, Aug. 10 -- Energy commodities were mixed on Aug. 9 as prices generally pulled back from an earlier rally that day based on bullish data showing strong US demand.

Energy prices also were down in early trading on Aug. 10 with many airline flights canceled in the UK, US, and Europe after UK authorities said they had stopped a terrorist plot to blow up several airplanes en route to the US. Traders figured the groundings and resulting public fear will reduce demand for jet fuel.

Demand stays strong
The US Energy Information Administration reported commercial US crude inventories fell by 1.1 million bbl to 332.6 million bbl during the week ended Aug. 4. Gasoline stocks dropped 3.2 million bbl to 207.7 million bbl during the same period, while distillate fuel inventories were down by 200,000 bbl to 132.4 million bbl (OGJ Online, Aug. 9, 2006).

The larger-than-expected drawdown of gasoline inventories "was the result of solid demand and lower imports," said Jacques Rousseau, senior energy analyst at Friedman, Billings, Ramsey Group Inc., Arlington, Va. "Gasoline stocks now stand at the 5-year average for this calendar week (and near a low on a days-of-demand cover basis) and could fall further given the potential for supply disruptions on the West Coast due to the crude oil pipeline issues in Alaska," he said.

"The level of implied US gasoline demand has now been recorded at above 9.5 million b/d for the past 7 weeks, and at above 9.6 million b/d for the past 2 weeks," said Paul Horsnell, Barclays Capital Inc., London, in an Aug. 9 report. "With the average price for regular gasoline now just 3¢ below the all-time peak, a bearish view on the market might have expected to see strong evidence of demand cratering by now. However, so far that is not happening."

Horsnell said, "Heating oil inventories are still rising on a slightly faster-than-normal seasonal pattern, while diesel inventories are continuing to contract sharply."

Meanwhile, BP PLC has shut in 200,000 b/d of the usual 400,000 b/d of crude production from Prudhoe Bay on Alaska's North Slope in order to assess and repair corrosion in sections of 22 miles of transit pipeline that connects the field to the Trans-Alaska Pipeline System. BP officials are investigating whether part of the field might remain on stream while the repairs are made. Even so, observers said it would be 5-6 months before the largest US oil field is back in full production. "Prudhoe is an aging field with declining output. It is far from certain that [previous] output [levels] will be reachable when the shut-in production is put back on line," said Olivier Jakob, managing director of Petromatrix GMBH, Zug, Switzerland (OGJ Online, Aug. 9, 2006).

The Organization of Petroleum Exporting Countries said Aug. 10 it "stands ready to do all in its power to correct any imbalance in the market." In a prepared statement, the organization said: "Some of OPEC's producers can bring additional supplies to the market very quickly, if such action is deemed necessary, subject of course to adequacy of refining capacity. In fact, the organization has boosted oil output by some 4.5 million b/d since 2002 to ensure that the market remains well supplied. However, for the time being, the organization remains confident that the world is still adequately supplied with oil and that no shortage will occur."

Many outside observers remain skeptic that additional crude from either OPEC members or the US Strategic Petroleum Reserve is of comparable quality as Alaskan crude or that it could reach West Coast refineries in a timely manner. Very large crude carrier tankers that bring foreign crude into East Coast and Gulf Coast ports are too big to pass through the Panama Canal, so the crude would have to be transported in smaller vessels in loads of 500,000 bbl. Once the crude reaches the Caribbean, it would take 2-3 weeks for a cargo to pass through the canal to the West Coast.

Horsnell sees the Prudhoe Bay shutdown as "further evidence that consensus views on the path of [increased] non-OPEC output are too optimistic." With the status of crude supplies questionable in the face of sustained strong demand, Barclays Capital increased its estimated average price for benchmark US light, sweet crudes to $72.60/bbl for 2006, up from $68/bbl previously. The company is projecting that crude price to average $78.60/bbl for the rest of this year, dropping to an average $76.60/bbl in 2007 and $72.30/bbl in 2010. "We are also extending the deck by introducing a forecast for 2015 of $93/bbl," Horsnell said.

Energy prices
The September contract for benchmark US crudes closed at $76.35/bbl, up 4¢ for the day after trading at $76.20-77.40/bbl Aug. 9 on the New York Mercantile Exchange. The October contract lost 19¢ to $77.53/bbl. On the US spot market, West Texas Intermediate at Cushing, Okla., was up by 4¢ to $76.36/bbl. Unleaded gasoline for September delivery dropped 5.41¢ to $2.17/gal on NYMEX. Heating oil for the same month declined by 1.01¢ to $2.11/gal.

The September natural gas contract shot up by 49.3¢ to $7.65/MMbtu on NYMEX in anticipation of the first ever drawdown of US gas supplies in August. The consensus among Wall Street analysts was that the withdrawal would be 1 bcf. Instead, EIA said Aug. 10 that 12 bcf was withdrawn from US underground storage during the week ended Aug. 4 vs. injections of 19 bcf the previous week and 43 bcf during the same period last year. US gas storage now stands at 2.76 tcf, up by 306 bcf from year-ago levels and 374 bcf above the 5-year average.

In London, the September IPE contract for North Sea Brent crude dropped 27¢ to $77.28/bbl. However, gas oil for August inched up by 25¢ to $668.75/tonne.

The average price for OPEC's basket of 11 benchmark crudes dipped by 14¢ to $72.53/bbl on Aug. 9.

Contact Sam Fletcher at [email protected].