MARKET WATCH: Crude build pulls down prices

Crude prices retreated June 20 with the report of an unexpected large increase in US crude inventories to a 9-year high outweighing the start of a strike by oil workers in Nigeria meant to cripple that country's crude exports.

Sam Fletcher
Senior Writer

HOUSTON, June 21 -- Crude prices retreated June 20 with the report of an unexpected large increase in US crude inventories outweighing the start of a strike by oil workers in Nigeria meant to cripple that country's crude exports.

The Energy Information Administration said commercial US crude inventories jumped by 6.9 million bbl to 349.3 million bbl, a 9-year high, in the week ended June 15, vs. a consensus expectation of a 100,000 bbl draw in that period. US gasoline stocks gained 1.8 million bbl to 203.3 million bbl in the latest week, but remained well below average for this time of year. "All of the increase was due to a build in gasoline blending components," EIA said. Distillate fuel inventories inched higher by 100,000 bbl to 122.7 million bbl (OGJ Online, June 20, 2007).

"For now US crude oil stocks are at the highest levels since 1998," said Olivier Jakob, managing director of Petromatrix GMBH, Zug, Switzerland. "Crude oil stocks in the US are as high as they can be, and there has been in the first half of 2007 no evidence of reduced flows to the US despite the Organization of Petroleum Exporting Countries' cuts." However, Jakob said, "US crude oil stocks should come down with coming higher refinery utilization rate but the draw is needed as we are basically at peaks of recent known tank space capacity."

Last week's crude imports into the US Gulf Coast region was "the largest number ever recorded" despite lower Mexican production, said Jakob.

Paul Horsnell at Barclays Capital Inc., London, said Gulf Coast imports surged last week because the economics of holding floating storage in the US gulf have collapsed. Due to the narrowing of time spreads [the selling of a nearby option and buying of a more deferred option with the same strike price specified in the contract] for benchmark US crudes, he said, "Cash-and-carry arbitrage, (i.e. buy now, sell later, lock-in the prices, and store the oil), is becoming far less attractive." That means that crude held in floating storage in gulf waters off the US—"and there may have been as much as 20 million bbl of it," Horsnell said—now must empty into either US gulf or Caribbean facilities.

"Indeed, some of the dynamics of the latest weekly US data suggest that the oil is now finding its way into the data," said Horsnell. "The most suggestive data points are the 1.4 million b/d rise in crude imports into the US gulf (while imports fell by 700,000 b/d in the rest of the US), and the 6.6 million bbl build in Gulf Coast inventories, accounting for virtually all the overall 6.7 million bbl build. Crude oil imports into the US Gulf ran at 7.148 million b/d, the highest ever single week's import level. Having the highest-ever imports into the Gulf Coast at the same time as low imports elsewhere in the US, at a time of high refinery outages, does seem to very strongly suggest that some of that floating storage is now making its way into the numbers."

Analysts in the Houston office of Raymond James & Associates Inc. said, "On a seasonal basis, [US] refinery utilization has now fallen to its lowest level in 16 years." They reported the strike by Nigerian oil workers pushed crude prices higher in early trading June 21. Nigerian oil worker unions earlier called for a general nationwide strike on June 20 to protest a government price hike on fuel for autos and a tax increase (OGJ Online, June 20, 2007).

Meanwhile, the Nigerian army reported it raided an Eni SPA flow station and rescued some of the 27 worker and military hostages being held there by militants.

Energy prices
The July contract for benchmark for US sweet, light crudes dropped 91¢ to $68.19/bbl June 20 on the New York Mercantile Exchange. The August contract fell 68¢ to $68.86/bbl. On the US spot market, West Texas Intermediate at Cushing, Okla., was down 91¢ to $68.20/bbl. Heating oil for July delivery gained 0.71¢ but its closing price was virtually unchanged at $2.23/gal on NYMEX. The July contract for reformulated blend stock for oxygenate blending (RBOB) declined by 0.65¢ but closed virtually unchanged at $2.23/gal.

The July natural gas contract lost 12.8¢ to $7.39/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., dropped 9.5¢ to $7.38/MMbtu. EIA reported June 21 the injection of 89 bcf of natural gas into US underground storage in the week ended June 15. That compared with injections of 92 bcf the prior week and 79 bcf during the same period a year ago. US gas storage is now at 2.344 tcf, down 121 bcf from a year ago but up 365 bcf from the 5-year average.

In London, the August IPE contract for North Sea Brent crude fell $1.42 to $70.42/bbl. The July gas oil contract was unchanged at $651/tonne. Jakob said, "Despite the strike in Nigeria, Brent continues to lose its premium to WTI, which is now close to $5/bbl lower than a month ago. The contango on Brent is now also wider than on WTI, reversing the trend of previous months."

The average price for OPEC's basket of 11 benchmark crudes lost 45¢ to $67.78/bbl on June 20.

Contact Sam Fletcher at samf@ogjonline.com.

More in General Interest