MARKET WATCH: Lower inventories raise oil, gasoline prices

Surprisingly low refinery utilization and larger-than-expected declines in US inventories of gasoline and crude triggered a spike in oil prices above $73/bbl Aug. 29.

Aug 30th, 2007

Sam Fletcher
Senior Writer

HOUSTON, Aug. 30 -- Surprisingly low refinery utilization and larger-than-expected declines in US inventories of gasoline and crude triggered a spike in oil prices above $73/bbl Aug. 29 for the largest gain in more than a month.

The Energy Information Administration reported commercial US crude inventories fell 3.5 million bbl to 333.6 million bbl during the week ended Aug. 24. That surpassed the consensus expectation of a 600,000 bbl draw (OGJ Online, Aug. 29, 2007). US gasoline stocks dropped 3.6 million bbl to 192.6 million bbl in the same period, vs. a consensus draw of 2.5 million bbl; gasoline supply is well below average for this time of year with declines in both finished gasoline and gasoline blending components. Distillate fuel inventories increased 900,000 bbl to 129.9 million bbl, slightly more than the consensus build of 800,000 bbl. US refinery utilization fell to 90.3% during the same week from 91.6% the prior week.

"Gasoline inventories fell by 4.7 million bbl east of the Rockies and hit their lowest absolute level since the 2005 hurricanes," said Paul Horsnell at Barclays Capital Inc., London. "In terms of days of forward cover, they are even tighter than that." US gasoline supplies are now 8.2% below year-ago levels, having fallen 12.1 million bbl in 4 weeks.

"The large gasoline draw has left stockpiles at the lowest level since 1991, when the government began collecting this data," said analysts in the Houston office of Raymond James & Associates Inc.

However, Olivier Jakob, managing director of Petromatrix GMBH, Zug, Switzerland, noted that half of last week's draw of crude stocks occurred in "discounted" Petroleum Administration for Defense District 5 (PADD 5) for Hawaii, Alaska, and the West Coast of the continental US. In the other four PADDs, Jakob said, "Overall US crude stocks remain at multiyear highs for the period, both in absolute terms and in days of forward cover but with a balance which remains underweight in PADD 2 [the Midwest] and overweight in PADD 3 [the Gulf Coast]; and this continues to prevent significant pressure to develop on the front West Texas Intermediate time spreads."

Meanwhile, markets are facing the long Labor Day holiday weekend Sept. 1-3 that historically marks the end of the peak summer driving season in the US. Gasoline demand historically increases during that last US summer holiday.

Moreover, Raymond James analysts warned, "Problems out of Freddie Mac may be the catalyst for another off day" in the equity and commodity markets. Freddie Mac is a nickname for the Federal Home Loan Mortgage Corp., a government-chartered corporation that buys qualified residential mortgage loans from the financial institutions that originate them, securitizes the loans, and repackages them to sell as investment securities. The securities are not guaranteed by the US government and their market value fluctuates.

"All eyes remain on the Fed [the Federal Reserve System, which is the US central bank]. "Will they cut [interest] rates or not?" the analysts questioned.

Analysts and traders also are watching areas of the Atlantic Ocean where thunderstorms may be forming into larger tropical systems. The area with the highest potential to develop into a tropical depression is a tropical wave 600 miles east of the Windward Islands that is moving into an area of lower wind shear and extremely warm ocean water temperatures.

Energy prices
The October contract for benchmark US sweet, light crudes escalated by $1.78 to $73.51/bbl Aug. 29 on the New York Mercantile Exchange. The November contract gained $1.64 to $72.78/bbl. On the US spot market, WTI at Cushing, Okla., was up $1.78 to $73.52/bbl. The September contract for reformulated blend stock for oxygenate blending (RBOB) led the market, jumping 8.54¢ to $2.10/gal on NYMEX. Heating oil for the same month rose 4.56¢ to $2.04/gal.

The September natural gas contact dropped 16.3¢ to $5.43/MMbtu on NYMEX. On the US spot market, however, gas at Henry Hub, La., climbed by 10.5¢ to $5.66/MMbtu. EIA reported Aug. 30, the injection of 43 bcf of natural gas into US underground storage during the week ended Aug. 24. That was within the consensus of Wall Street analysts and compared with injections of 23 bcf the prior week and 48 bcf during the same period in 2006. US gas storage now stands at 2.969 tcf, up by 71 bcf from year-ago levels and 315 bcf above the 5-year average.

In London, the October IPE contract for North Sea Brent crude increased $1.58 to $72.13/bbl. Gas oil for September gained $9 to $635.25/tonne.

The average price for the Organization of Petroleum Exporting Countries' basket of 11 reference crudes inched up 11¢to $68.30/bbl on Aug. 29.

Contact Sam Fletcher at samf@ogjonline.com.

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