MARKET WATCHOil futures prices hit record highs

Sam Fletcher
Senior Writer

HOUSTON, Mar. 18 -- The April contract for benchmark US light, sweet crudes hit a 13-year high of $38.35/bbl Wednesday before closing at $38.18/bbl, up 70¢ for the day on the New York Mercantile Exchange, as traders ignored a build in US crude inventories to focus on an unexpected drop in gasoline stocks.

The May contract for benchmark US crudes gained 94¢ to $37.62/bbl on NYMEX. On the US spot market, West Texas Intermediate at Cushing, Okla., also increased by 70¢ to $38.18/bbl.

Record prices likely
This quarter will record the highest average NYMEX price for benchmark US crudes "since futures trading began in 1983," predicted Paul Horsnell, head of energy research, Barclays Capital Inc., London. "The current month may also record the highest single month average."

The current record average price for front-month benchmark US crudes is $35.92/bbl, set in October 1990, 2 months after Iraq's invasion of Kuwait. "However, the average for March 2004 to date is higher at $36.67/bbl, raising the strong possibility that this month could represent a new high point," Horsnell reported Wednesday.

"It is already absolutely inevitable that the current quarter will be the highest in the 21-year history of [NYMEX crude] futures [prices]," he said. "The previous high was the first quarter of last year when prices averaged $33.80/bbl. With just 11 trading days to go, the average for this quarter is currently running more than $1 higher at $34.92/bbl."

Products lead market
Meanwhile, gasoline for April delivery jumped by 3.4¢ to $1.1577/gal Wednesday on NYMEX after the US Energy Information Administration reported US gasoline stocks fell by 800,000 bbl to 199.6 million bbl during the week ended Mar. 12, marking the first time since Nov. 28, 2003, that gasoline has fallen below 200 million bbl.

April heating oil shot up by 4.37¢ to 95.85¢/gal Wednesday. EIA reported distillate fuel inventories fell by 900,000 bbl to 11.8 million bbl, while US inventories of crude increased by 1.6 million bbl to 281.1 million bbl during the same period.

The April natural gas contract gained 3.4¢ to $5.72/Mcf Wednesday on NYMEX, "driven by a firmer crude oil market, stable cash [US natural gas spot market], and some cool weather this week in the Northeast and Midwest," said analysts Thursday at Enerfax Daily. "The [natural gas futures] market feels like it's running out of steam, but the crude oil market keeps dragging it higher."

Early Thursday, EIA reported 46 bcf of natural gas were withdrawn from US underground storage during the week of Mar. 12. That compares with withdrawals of 28 bcf the previous week and 82 bcf during the same period in 2003. US gas storage is now just under 1.1 tcf, representing a surplus of 443 bcf from year-ago levels and a deficit of 68 bcf from the 5-year average.

In London, the May contract for North Sea Brent oil increased by 85¢ to $33.53/bbl Wednesday on the International Petroleum Exchange. Gas oil for April delivery gained $10.50 to $290.25/tonne. The April natural gas contract was up by 0.74¢ to the equivalent of $3.68/Mcf on IPE.

The average price for the Organization of Petroleum Exporting Countries' basket of seven benchmark crudes increased by 36¢ to $32.95/bbl Wednesday.

The American Petroleum Institute reported US gasoline stocks fell by 1.2 million bbl to 197.96 million bbl during the week ended Mar. 12, with distillate stocks down by 625,000 bbl to 112.8 million bbl. It said US crude inventories dipped by 75,000 bbl to 282.2 million bbl.

US gasoline inventories "are tracking last year's path" that "resulted in the two largest price spikes in history and is therefore not a good one to follow," Horsnell said. "Furthermore, inventories are not gaining ground on last year, even with output running more than 500,000 b/d higher and imports moving sharply higher even earlier than last year."

He said, "The degree of additional supply-side flexibility at this point can be roughly assessed as being zero."

Meanwhile, the American Automobile Association recently reported that US retail pump prices for gasoline are nearly identical to those of a year ago just before the US-led invasion of Iraq. The current nationwide average retail price for self-serve regular gasoline is $1.72/gal, up 0.5¢ from a year ago.

OPEC blameless?
Under the circumstances, there's no need for OPEC members to postpone the 1 million b/d production cut scheduled for Apr. 1, Horsnell said.

"They can see crude oil inventories rising, albeit at no more than the usual seasonal pace and from a lower-than-normal base, and they can see the deficit in total inventories from the 5-year average continuing to narrow," he said. "If they conclude from this that the main issue is a downstream problem of US gasoline production and logistics, they would probably infer that throwing more crude oil at the problem is not the solution."

Instead, Horsnell said, "It would put the root cause for higher global prices firmly at the feet of the US gasoline system and absolve OPEC of any suggestion that they had the responsibility to compensate by the overprovision of crude oil. Indeed, they would probably worry even more about the possibility of laying the grounds for a more severe price fall later, making it seem even more logical to continue with significant output cuts."

Contact Sam Fletcher at [email protected]