MARKET WATCHMarkets retreat from Bush's attack on high energy prices

April 26, 2006
For the first time in a week, the front-month crude futures contract fell below $73/bbl on the New York market Apr. 25.

Sam Fletcher
Senior Writer

HOUSTON, Apr. 26 -- For the first time in a week, the front-month crude futures contract fell below $73/bbl on the New York market Apr. 25 after US President George W. Bush ordered the Department of Energy to stop filling the US Strategic Petroleum Reserve in an effort to reduce retail gasoline prices.

Bush said he also would direct the Environmental Protection Agency temporarily to waive requirements for use of reformulated gasoline in some metropolitan areas with high pollution levels in order to ease the transition by refiners to ethanol from methyl tertiary butyl ether (MTBE) as an oxygenate in reformulated gasoline (RFG). He also wants EPA to investigate whether the number of localized fuel blends, or boutique fuels, can be reduced.

But the market may have overreacted, critics said, since the plan would only release slightly more oil into a market where US refineries operated at 88.2% of capacity during the week ended Apr. 21. And the chance that any waivers will change the current tight gasoline market "is fairly small," said Jacques Rousseau senior energy analyst at Friedman, Billings, Ramsey Group Inc., Arlington, Va.

"Delaying the elimination of the oxygenate standard is unlikely, in our view. The EPA could not change the date for the elimination of the RFG oxygenate rule, because it is written in US law as part of the Energy Policy Act of 2005, and only congressional legislation could change it," Rousseau said. Congress is unlikely to reopen the energy act to debate, he said. EPA now has authority to grant RFG waivers based on "a demonstrated and unanticipated supply shortage," as happened in 2005 after Hurricanes Katrina and Rita. "Not only is the current gasoline crisis more of a price than a supply issue, but the event causing the shortage also is not unanticipated," Rousseau said.

International factors
Like many such assessments by people outside the business, Bush's plan fails to recognize the international nature of the oil industry. Even if a US RFG waiver was granted, gasoline inventories in Europe and Asia are low, and "with many refiners in both regions set for maintenance turnarounds, the impact could be minimal," said Rousseau.

Analysts at Petromatrix Gmbh in Zug, Switzerland, recently reported that Chinese imports of crude were as strong in March as in January and February. "Continued high crude demand in China and India, combined with low stocks in OECD Asia [Organization for Economic Cooperation and Development] and the upcoming fill of the strategic stocks in China, will make Asia a very strong pull area in the second half of the year and will be a challenge to safe management of the world crude oil supply if disruptions continue in Nigeria or from hurricanes."

Recent crude prices of $70-75/bbl are the result of an aggregate disruption of 2 million b/d of production in world markets, said Daniel Yergin, chairman of Cambridge Energy Research Associates (CERA), at a Washington energy conference earlier this week. That is too much to be offset by eliminating purchases for SPR.

CERA expects world oil demand to increase by 1.7 million b/d in both 2006 and 2007—a 2.1% annual gain for both years. It foresees spare production among members of the Organization of Petroleum Exporting Countries increasing to 2.4 million b/d in 2007 from 1.9 million b/d today. "Higher spare capacity can diminish market fears about supply availability, but this moderate increase will not eliminate concerns linked to potential or actual supply disruptions. This means that fear of or actual disruptions are likely to continue to exert a significant, but somewhat diminished influence on the oil price through 2007," CERA officials said.

Meanwhile, the Energy Information Administration reported Apr. 26 that commercial US crude inventories (excluding those in SPR) dipped by 200,000 bbl to 345 million bbl during the week ended Apr. 21, still well above the upper end of the average range for this time of year. US gasoline stocks dropped by 1.9 million bbl to 200.6 million bbl and are now below the lower end of the average range. Distillate fuel inventories increased by 1 million bbl to 115.6 million bbl during the same period, with increases of both diesel and heating oil.

Imports of crude into the US increased by 199,000 b/d to 9.9 million b/d in the latest period. Input of crude into US refineries was up by 343,000 b/d to 15.1 million b/d.

Energy prices
The June contract for benchmark US light, sweet crudes dropped 45¢ to $72.88/bbl Apr. 25 on the New York Mercantile Exchange. The July contract dipped by 8¢ to $74.48/bbl. On the US spot market, however, West Texas Intermediate fell by $1.71 to $68.38/bbl. Gasoline for May delivery lost 4.48¢ to $2.13/gal on NYMEX, but heating oil for the same month increased by 2.64¢ to $2.06/gal.

The May natural gas contract fell by 30.4¢ to $7.25/MMbtu on NYMEX, following the crude market down. Forecasters say natural gas demand will be 15% below average through the rest of this month.

In London, the June IPE contract for North Sea Brent crude climbed by 21¢ to $73.21/bbl. However, the May gas oil contract lost $3 to $638.50/tonne.

The average price for OPEC's basket of 11 benchmark crudes fell by $1.10 to $66.27/bbl on Apr. 25.

Contact Sam Fletcher at [email protected].