MARKET WATCH Crude, products futures prices continue to climb

Sam Fletcher
Senior Writer

HOUSTON, Apr. 24 -- Futures prices for crude and petroleum products continued to climb Apr. 21 amid persistent concerns about possible shortages, particularly through disruption of crude exports from Iran and Nigeria.

The US and Iran still appear on a collision course via the United Nations Security Council over Iran's proposed nuclear program.

Meanwhile, Shell Petroleum Development Co., the joint venture between Royal Dutch Shell PLC and state-run Nigerian National Petroleum Corp., said it is in no hurry to resume crude production in Nigeria until the oil-rich Niger Delta region is secured against further attack by militants. Some 455,000 b/d of crude production was shut in by Shell following earlier attacks against company facilities and the kidnapping of workers.

Nigeria is reported to have lost more than $1.5 billion in crude export revenues. The government recently moved in more troops to secure oil facilities in the delta.

Elsewhere, sharp increases in taxes and royalties being considered in Venezuela for foreign operations in the Orinoco River basin "should fend off any fears that more oil will hit the market any time soon," said analysts in the Houston office of Raymond James & Associates Inc.

Gasoline prices escalate
While crude prices have shot up 19% since the beginning of March, US gasoline retail prices have escalated 30% as refiners hurry to replace methyl tertiary butyl ether with ethanol by May 6.

"A few of the bigger concerns include: Is there enough ethanol production to meet the new standards? Is there enough transportation infrastructure (rail cars, tankers, etc.) to move the ethanol to the blending areas? And will there be gasoline contamination issues within existing gasoline storage tanks as the industry draws down MTBE inventories and reloads with ethanol inventories?" said J. Marshall Adkins in Raymond James's Houston office.

"What we do know is that the change in gasoline formulas has left the market on edge," said Adkins. "For that reason, speculators have bid up the price of gasoline in recent weeks to capitalize on any disruptions."

Escalation of gasoline futures prices helped push the New York crude futures market past $70/bbl, "despite record crude inventory levels," he said. "While we believe there is the potential for localized gasoline shortages in the coming weeks, the probability of widespread shortages is remote, and the low gasoline inventory situation should improve through the summer. However, volatility in the gasoline market should help keep oil prices at or near record levels into the June timeframe, at which time the markets will become more concerned with new sulfur regulations in distillate fuels such as jet fuel, heating oil, and diesel."

The rally in gasoline prices should help East Coast refiners such as Sunoco Inc., which suffered through a dismal winter market for heating oil.

"Sunoco's stock has been the worst performer in the refining sector this year, due primarily to the majority of the company's refining capacity being located in the Northeast, where record warm winter temperatures reduced heating oil demand," said Jacques Rousseau, senior energy analyst at Friedman, Billings, Ramsey Group Inc., Arlington, Va. However, the company's same Northeast exposure "is likely to prove beneficial in the second quarter since gasoline inventories are very low, and we expect the logistical problems caused by the changeover from MTBE to ethanol as an octane enhancer to support strong East Coast refining margins," he reported Apr. 24.

Energy prices
The June contract for benchmark US light, sweet crudes closed at $75.17/bbl Apr. 21, up by $1.48 for the day after trading at $72.73-75.35/bbl during the session on the New York Mercantile Exchange. The July contract was up by $1.47 to $76.20. Gasoline for May delivery climbed by 2.36¢ to $2.24/gal on NYMEX. Heating oil for the same month increased by 2.26¢ to $2.08/gal.

However, the May natural gas contract lost 8.3¢ to $7.98/MMbtu on NYMEX after the Energy Information Administration reported a lower-than-expected injection of natural gas into underground storage (OGJ Online, Apr. 20, 2006). "The market had rallied by 20% in the previous four sessions despite little apparent change in fundamentals, driven higher by hedge fund buying, a spate of record highs in crude oil [prices], and a surge in natural gas demand due to an April heat wave in Texas," said analysts at Enerfax Daily.

In London, the June IPE contract for North Sea Brent crude gained $1.39 to $74.57/bbl. The May gas oil contract increased by $8 to $641/tonne.

The average price for the Organization of Petroleum Exporting Countries' basket of 11 benchmark crudes dipped by 16¢ to $66.84/bbl on Apr. 21.

Contact Sam Fletcher at [email protected].