MARKET WATCH: Surprise drop in US crude stocks pushes up prices

Oil futures prices continued to climb May 31 in the New York market after the government reported an unexpected drop in US crude stockpiles.

Sam Fletcher
Senior Writer

HOUSTON, June 1 -- Oil futures prices continued to climb May 31 in the New York market after the government reported an unexpected drop in US crude stockpiles.

The US Energy Information Administration said commercial inventories of US benchmark light, sweet crudes fell by 2 million bbl to 342.2 million bbl in the week ended May 25. Gasoline stocks increased more than expected, up by 1.3 million bbl to 198 million bbl in the same period, but still well below average for the summer driving season that began May 26-28. However, analysts noted that utilization rates of US refineries remained relatively flat at 91.1% of capacity in the last week before the summer driving season began (OGJ Online, May 31, 2007).

"We find crude oil remaining undecided on its direction," said Olivier Jakob, managing director of Petromatrix GMBH, Zug, Switzerland. "The [June 1] start of the hurricane season will give cold feet to short traders, but likewise the crude balances do not show enough of an imbalance to give full traction to bull rides," he said.

Analysts in the Houston office of Raymond James & Associates Inc. reported June 1 the "expulsion" of participants in a 3-day protest at a major oil export pipeline complex in Nigeria. "However, reports indicate that some 922,000 b/d of Nigerian production is still shut-in as a result of militant attacks and political turmoil," the analysts said.

In a separate report, Jakob said imports of crude into China and India during April surpassed "for the first time ever" crude imports into South Korea and Japan. "As Japanese refineries come back from maintenance, this should remain for now a temporary situation, but this structural shift in the regional energy balance should continue and become more permanent over the next 2 years," he said. "Compared to April 2006, China and India crude imports have grown by about the same quantity. South Korea imports remain about unchanged, while Japan continues to import much lower volumes than last year."

By lowering Japanese requirements, this year's warm Asian winter mitigated the impact of the Chinese and Indian crude demand growth. "It is now Japan that holds the key to the regional supply and demand. A normal winter and renewed Japanese refinery runs for kerosine would cause the Chinese and Indian growth to be fully felt in the market," said Jakob. Among Asian members of the Organization for Economic Cooperation and Development such as Japan and South Korea, Jakob said, refinery runs will now start to increase as they come out of the seasonal maintenance and should bring the region to new record-high crude imports. "The real test to OPEC compliance [with its production quota] will come when Japanese crude oil demand starts to rise again, and indications from OPEC trackers are that OPEC supply is starting to slowly increase," he said.

Energy prices
The July contract for benchmark US light, sweet crudes gained 52¢ to $64.01/bbl May 31 on the New York Mercantile Exchange. The August contract increased by 34¢ to $64.99/bbl. On the US spot market, West Texas Intermediate at Cushing, Okla., was up 52¢ to $64.02/bbl. Heating oil for June delivery inched up 0.72¢ to $1.88/gal on NYMEX. The June contract for reformulated blend stock for oxygenate blending (RBOB) dropped 2.13¢ to $2.25/gal, however.

The July natural gas contract traded as high as $8/MMbtu on May 31 on NYMEX before closing at $7.94/MMbtu, down just 0.06¢ for the day. On the US spot market, natural gas at Henry Hub, La., increased by 6¢ to $7.75/MMbtu. "Another triple-digit storage injection reported by the EIA offset forecasts for hotter weather," explained analysts at Enerfax Daily. Next week's forecast is for much higher-than-normal temperatures for most of the US east of the Rocky Mountains.

EIA reported the injection of 107 bcf of natural gas into US underground storage for the week ended May 25, up from 104 bcf the prior week and 80 bcf during the same period a year ago. US gas storage is now at 2.1 tcf, down by 179 bcf from last year's total at this time but 355 bcf above the 5-year average.

The latest injection figure "implies that we are 1.9 bcfd looser year-over-year on a weather-adjusted basis," said Raymond James analysts. "No new story, but the influx of LNG imports continues to weigh on storage. While an increasing price incentive to burn natural gas over crude derivatives is serving to boost gas demand, the positive fuel-switching impact has not been enough to offset LNG imports and liquid stripping trends in the near term," they said.

In London, the July IPE contract for North Sea Brent crude increased 20¢ to $68.04/bbl. Gas oil for June gained $1.75 to $588/tonne.

The average price for OPEC's basket of 11 benchmark crudes was up 13¢ to $64.34/bbl on May 31.

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