MARKET WATCHCrude futures prices scramble to new highs

April 20, 2006
Crude energy prices continued climbing to record highs Apr. 19, topping $72/bbl on the New York Mercantile Exchange.

Sam Fletcher
Senior Writer

HOUSTON, Apr. 20 -- Crude energy prices continued climbing to record highs Apr. 19, topping $72/bbl on the New York Mercantile Exchange.

"Crude is now pushing $75," said J. Marshall Adkins in the Houston office of Raymond James & Associates Inc. "While oil inventories remain high in absolute terms, gasoline inventories look to be heading towards the southern end of historical averages. Combine this with the ongoing geopolitical tension abroad, and you get a worried energy market."

Three fundamental forces are causing energy prices to soar: production disruptions in Nigeria and Norway; concern about Iran's nuclear crisis, which some say has added $10/bbl to crude since the start of this year; and shrinking US supplies of gasoline at the start of the driving season. US gasoline inventories have fallen some 18 million bbl in the past 6 weeks as seasonal maintenance has reduced refinery operations.

Iran's standoff with the US and Europe over its nuclear program is "the key political driver of prices for this and succeeding years," with the potential "to rearrange the pieces in the Middle East . . . in a way that would not be benign for prices," said Paul Horsnell of Barclays Capital Inc., London.

"Nigeria remains the key short-term issue for us, and in particular the continuing erosion of the control of the central government over the Niger Delta, while Iran is the key longer-term development," he said. Although a series of price reductions and rallies is likely as the Iranian crisis develops, Horsnell sees a major confrontation with Iran is rapidly approaching.

Meanwhile, the Energy Information Administration said commercial US crude inventories dipped by 800,000 bbl to 345.2 million bbl in the week ended Apr. 14. Gasoline stocks dropped by 5.4 million bbl to 202.5 million bbl in the period, while distillate inventories fell by 2.8 million bbl to 114.6 million bbl. US imports of crude increased by 126,000 b/d to 9.7 million b/d in the same period (OGJ Online, Apr. 19, 2006).

East Coast inventories have fallen by 11.6 million bbl over the past 4 weeks, partly due to the switch from methyl tertiary butyl ether to ethanol as a gasoline additive. "But the scale of the fall remains beyond that which would be expected, given the difference in supply lines, and regardless of its motivation it still raises the question as to how inventories for the driving season can be built in a timely fashion," Horsnell said.

Hurricane recovery
Meanwhile, Shell Exploration & Production Co., New Orleans, said Apr. 20 it is ahead of schedule to restart production from its Mars tension-leg platform in the Gulf of Mexico by mid-May. Mars is the largest producing platform in the gulf that was affected by Hurricane Katrina, representing 5% of usual daily production from those waters.

Shell said construction activity for initial production at Mars should be completed by the end of this month with partial production expected to resume in late May. Mars production is expected to resume prestorm rates by the end of June. The TLP and its wells survived the hurricane, but its drilling rig and some major topside production equipment were heavily damaged.

The US Minerals Management Service reported 87 offshore platforms on federal leases in the Gulf of Mexico remained out of service Apr. 19, with 334,019 b/d of crude and 1.334 bcfd of natural gas production still shut in as the result of last year's hurricanes.

Cumulative production lost from Aug. 26 through Apr. 19 totaled 148.9 million bbl of crude and 730.5 bcf of gas. That's equivalent to 27.2% of the crude and 20% of the gas usually produced annually in those waters.

Energy prices
The May contract for benchmark US sweet, light crudes bumped up by 82¢ to close at a record high $72.17/bbl after trading at $70.70-72.40/bbl during the Apr. 19 session on NYMEX. The June contract gained $1.03 to $74.12/bbl. On the US spot market, West Texas Intermediate at Cushing, Okla., was up by 82¢ to $72.18/bbl. Gasoline and heating oil for May delivery on NYMEX gained 1.15¢ each to $2.24/gal and $2.06/gal, respectively.

The May natural gas contract increased by 18.4¢ to $8.19/MMbtu on more short-covering as the gas futures market followed crude prices higher on NYMEX. On Apr. 20, EIA reported the injection of 47 bcf of natural gas into US underground storage in the week ended Apr. 14. That was above the consensus of Wall Street analysts, up from an injection of 19 bcf the previous week but down from 50 bcf during the same period last year. US gas storage now stands at 1.8 tcf, up by 425 bcf from a year ago and 678 bcf above the 5-year average.

In London, the May IPE contract for North Sea Brent crude jumped by $1.22 to a record high of $73.73/bbl in that market. Gas oil for May gained $12.50 to $640/tonne.

The average price for the Organization of Petroleum Exporting Countries' basket of 11 benchmark crudes increased by 56¢ to $66.36/bbl on Apr. 19.

Contact Sam Fletcher at [email protected].