MARKET WATCHEnergy prices continue to retreat

Sam Fletcher
Senior Writer

HOUSTON, Apr. 27 -- Energy prices fell Apr. 26 for the third consecutive session in the New York futures market after the Energy Information Administration reported a drop in US inventories of crude and gasoline.

Crude stocks dipped by 200,000 bbl to 345 million bbl during the week ended Apr. 21 but are still above average for this time of year (OGJ Online, Apr. 26, 2006). Gasoline, on the other hand, dropped 1.9 million bbl to 200.6 million bbl in the same period, remaining below average with only a month left until the start of the US driving season on the Memorial Day weekend.

With some units still inoperable due to hurricane damage in 2005 and other facilities involved in seasonal maintenance, US refineries increased operations to 88.2% of capacity in the week ended Apr. 21, the highest level since January.

"Gasoline demand is now down an average of 0.3% over the prior 4-week period vs. comparable year-ago levels as high US average retail prices ($2.91/gal according to the Department of Energy) may be affecting demand," said Jacques Rousseau senior energy analyst at Friedman, Billings, Ramsey Group Inc., Arlington, Va. Still, he said, "We expect refined product inventories to continue declining, supporting margins."

Criticism continues
Criticism of President George W. Bush's plan for reducing gasoline prices, outlined in an Apr. 25 speech, continued (OGJ Online, Apr. 25, 2006).

Paul Horsnell of Barclays Capital Inc., London, noted that Bush in his speech mentioned ethanol as both a cause of high gasoline prices—due to supply disruptions in the switch from methyl tertiary butyl ether (MTBE) to ethanol as an additive for reformulated gasoline—and a cure, through greater use of alternative fuels, particularly ethanol. "That seems to be some strange form of economic homeopathy, but not one which we would think of as being particularly logical," Horsnell said.

"Ethanol currently makes up just 3% of US fuel supplies, and yet producing that amount requires 14% of US corn production. The production of US ethanol takes place with a tax credit of either 51¢ or 61¢/gal, depending on the size of the ethanol producer. Even with the help of those subsidies and other grants, ethanol is not exactly cheap at the current price of $2.64/gal for wholesale futures," Horsnell said. "In effect the US taxpayer is laying out extra money for the ethanol twice, once through financing the subsidy and once through the increase in pump prices."

Moreover, US producers of ethanol are protected against foreign competition with an import tariff of 59¢/gal on sources outside free trade zones. "Most notably, the tariff is levied on Brazilian ethanol," which the US expects to import in large volumes since domestic ethanol supplies aren't sufficient to meet the anticipated demand, Horsnell said. "Suspicions that the use of ethanol is more about the protection of US farming than the promotion of alternative fuels per se might have been allayed if that tariff were to be abolished, but it has so far remained."

Even at 3% of supplies, he added, "The use of ethanol has strained logistical systems to breaking point, primarily as ethanol cannot be transported through the pipeline system because it absorbs water and impurities. In addition, when one factors in the energy component used in the production of the corn and in the fertilizers used in intensive Midwest agriculture, plus the energy component required to produce the ethanol out of the corn, the energy efficiency and environmental basis for even more ethanol use seems to us to become a bit questionable."

Energy prices
The June contract for benchmark US sweet, light crudes lost 95¢ to $71.93/bbl Apr. 26 on the New York Mercantile Exchange. The July contract fell by $1 to $73.48/bbl. On the US spot market, however, West Texas Intermediate at Cushing, Okla., jumped by $3.56 to $71.94/bbl as it aligned with the price of the new front-month futures contract. Heating oil for May delivery dropped 3.52¢ to $2.02/gal on NYMEX, but gasoline for the same month inched up by 0.44¢ to $2.13/gal.

The May natural gas contract declined by 5.6¢ to $7.20/MMbtu, "following the oil complex lower after major refiners cranked up gasoline output in response to political pressure," said analysts at Enerfax Daily.

EIA reported Apr. 27 the injection of 80 bcf of natural gas into US underground storage during the week ended Apr. 21. That was above the consensus of Wall Street analysts and compared with the previous week's injection of 57 bcf, which EIA revised up from its initial report of 47 bcf. In the same period a year earlier, 73 bcf was injected.

The 10 bcf upward revision of the previous week's number reflected "both a change in the actual injection and a reclassification between base gas and working gas with the EIA unwilling to disclose the exact split," said Robert S. Morris at Banc of America Securities LLC, New York.

US storage now stands at 1.85 tcf of gas, up by 445 bcf from a year ago and 710 bcf above the 5-year average.

In London, the May IPE contract for North Sea Brent crude dropped $1.12 to $72.09/bbl. The May gas oil contract gained $2.25 to $640.75/tonne.

The average price for the Organization of Petroleum Exporting Countries' basket of 11 benchmark crudes regained 73¢ to $66.94/bbl on Apr. 26.

Contact Sam Fletcher at [email protected].