MARKET WATCH: Crude continues to test $73/bbl

Sam Fletcher
Senior Writer

HOUSTON, July 13 -- Crude prices again temporarily surpassed $73/bbl in intraday trading on the New York Market on July 12 but closed lower as BP PLC said it planned to restart some downed refinery capacity.

BP was reported to be restarting a crude processing unit shut in earlier this week at its 460,000 b/d Texas City, Tex., plant—the company's largest refinery worldwide and the third-largest refinery in the US. BP also is in the process of restarting a 250,000 b/d oil processing unit at its 410,000 b/d refinery in Whiting, Ind., following repair of a pipeline leak.

Olivier Jakob, managing director of Petromatrix GMBH, Zug, Switzerland, said the speculative push to pass $73/bbl in a possible climb to $75/bbl on New York commodity market continued for the fifth consecutive trading session but was "stopped for the second day in a row by a failing gasoline market." Jakob said, "The speculative assault on crude remains very impressive but to be sustained will need to have the support of the products. European simple refinery margins are already in the red and if the trend of rising [North Sea] Brent [crude prices] and falling gasoline was to continue, then the European complex refining margins will start to also be under serious pressure."

In its weekly report issued July 13, the International Energy Agency in Paris noted that Brent crude futures prices surged past $77/bbl in mid-July because of tight market fundamentals, increased geopolitical tension in some major oil producing countries, and indications of strong buying of petroleum futures by investment funds. "Falling refining margins suggest that market tightness is shifting from product to crude markets," IEA officials said.

IEA expects global demand for petroleum products to rise by a robust 2.5% to 88.2 million b/d in 2008, largely due to a weather-related rebound in the Organization for Economic Cooperation and Development member countries and strong demand in non-OECD countries. "This represents an increase of 2.2 million b/d, from the slightly revised 2007 level of 86 million b/d," the agency said.

IEA sees production capacity among members of the Organization of Petroleum Exporting Countries increasing by 2 million b/d to an average 35.4 million b/d, with non-OPEC production increasing by 1 million b/d to 51 million b/d. Among the latter group, IEA said, "Key growth drivers include the former Soviet Union, Latin America, and global biofuels. OECD Europe and North America [will] continue to see production decline, despite strong growth from the US Gulf of Mexico and Canadian oil sands."

It said global refinery crude throughput increased by 200,000 b/d in May to 72.7 million b/d, 400,000 b/d more than a year ago. "Crude throughput is forecast to increase rapidly to an August peak of 75.2 million b/d, on the back of higher runs in the OECD and the Middle East," said IEA.

Jakob said, however, "After over-estimating non-OPEC supply for many years, IEA is now over-estimating oil demand." He said, "The IEA has started to make downward revisions to 2007 oil demand but [is] still forecasting a 400,000 b/d demand growth in North America for the third quarter while the US Department of Energy is showing zero growth in the 4-week average; [it is] still forecasting demand growth for Europe in the third quarter when data released July 12 for Germany still shows demand down in June by 9.7%, Italy down by 2.9%, etc."

He said, "IEA is calling for demand in 2008 to grow at a much faster pace (plus 2.5%) than recent years. Given that current demand already has problems to reach the IEA 2007 estimate, we view the demand call for 2008 as optimistic especially with oil pricing at close to record highs."

Energy prices
The August contract for benchmark US light, sweet crudes closed at $72.50/bbl July 12, down just 6¢ for the day, after trading as high as $73.80/bbl during the session on the New York Mercantile Exchange. The September contract slipped by 7¢ to $72.87/bbl. On the US spot market, West Texas Intermediate at Cushing, Okla., was down 6¢ to $72.51/bbl. Heating oil for August delivery dipped by 0.51¢ but the average price was essentially unchanged at $2.10/gal on NYMEX. The August contract for reformulated blend stock for oxygenate blending (RBOB) dropped 4¢ to $2.27/gal.

The August natural gas contract lost 10.3¢ to $6.50/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., fell 33¢ to $6.27/MMbtu.

In London, the August IPE contract for North Sea Brent crude escalated by 96¢ to $76.40/bbl. Gas oil for July was unchanged at $650.25/tonne.

The average price for OPEC's basket of 11 benchmark crudes increased by 6¢ to $71.96/bbl on July 12.

Contact Sam Fletcher at [email protected].