MARKET WATCH Increased crude inventory pushes down energy prices

Energy prices continued their daily seesaw movement Wednesday, with most commodities dropping after the US Energy Information Administration reported US crude inventories jumped by 2.5 million bbl to 305.4 million bbl in the week ended June 18, the highest level since the week ended Aug. 2, 2002.

June 24, 2004

4 min read

Sam Fletcher
Senior Writer

HOUSTON, June 24 -- Energy prices continued their daily seesaw movement Wednesday, with most commodities dropping after the US Energy Information Administration reported US crude inventories jumped by 2.5 million bbl to 305.4 million bbl in the week ended June 18, the highest level since the week ended Aug. 2, 2002.

Nevertheless, commercial US crude stocks remained 4.5 million bbl below the 5-year average. US gasoline stocks fell by 800,000 bbl to 205.1 million bbl in the same period, 9 million bbl below the 5-year average. Distillate fuels rose by 600,000 bbl to 110.4 million bbl with an increase in heating oil more than offsetting a slight drop in diesel fuel.

Some attributed the rise in US crude inventories to "runaway imports during the week." But EIA said US crude imports were down by 83,000 b/d to 10.2 million b/d in the week ended June 18. And despite talk of increased production from the Organization of Petroleum Exporting Countries, EIA noted, "It appears that the two largest sources of crude oil imports were from Mexico and Canada."

"While product availability continues to tighten, crude availability continues to improve," said Paul Horsnell, head of energy research, Barclays Capital Inc., London. That means "the impact of a build up in crude inventories is negated by the tightness in gasoline, particularly on the East Coast," he said. "Gasoline output is continuing to head downwards." With US refineries operating at 95.6% of capacity, EIA said, gasoline production fell slightly, averaging nearly 8.7 million b/d in the week ended June 18.

"US oil demand continues to surprise on the upside. The overall demand gain for June to date is 705,000 b/d with increased demand seen in every product category," Horsnell said. "Distillate demand remains very strong indeed, with year-to-year growth for June to date running at 4%."

He said, "With spare capacity so limited, with Iraq such a source of longer-term uncertainty and short-term shocks, with global demand strong, supply weak, and with a host of potential short-term disruptions such as that in progress in Norway, we believe that the speculative bears are now pushing too hard. Expect to see further immediate price weakness with short-term insulation from bullish news and further overreaction to bearish morsels. Then expect to see a rush to cover shorts [uncovered sales contracts] and a correction back up."

Traders shrugged off the strike spreading among Norwegian oil field workers, which is now expected to reduce Norway's oil production by 700,000 b/d, up from 300,000 b/d at the June 17 start of the strike. The Norwegian government was reported Thursday to be taking steps to stop a planned lockout of offshore workers, effective Monday, by the Norwegian Oil Industry Association.

Energy prices
The new near-month August contract for US light, sweet crudes fell by 68¢ to $37.57/bbl Wednesday on the New York Mercantile Exchange, while the September contract lost 61¢ to $37.64/bbl. On the US spot market, West Texas Intermediate at Cushing, Okla., was down by 45¢ to $37.68/bbl.

Heating oil for July delivery lost 1.72¢ to 99.98¢/gal Wednesday on NYMEX. However, gasoline for the same month inched up by 0.26¢ to $1.2015/gal. The July natural gas contract gained 0.3¢ to $6.42/Mcf Wednesday as traders covered outstanding sales contracts ahead of EIA's weekly report on US gas storage.

Early Thursday, EIA reported 85 bcf of gas injected into US underground storage in the week ended June 18. That was below the consensus of Wall Street analysts and down from injections of 94 bcf the previous week and 127 bcf during the same period last year. US gas storage now exceeds 1.8 tcf, representing a surplus of 280 bcf over a year ago but 1 bcf below the 5-year average.

In London, the August contract for North Sea Brent crude lost 58¢ to $35.03/bbl Wednesday on the International Petroleum Exchange. Gas oil for July delivery lost $1.75 to $311.75/tonne. However, the July natural gas contract gained 0.74¢ to the equivalent of $3.82/Mcf on IPE.

The average price for OPEC's basket of seven benchmark crudes dipped by 12¢ to the equivalent of $34.24/bbl Wednesday.

Contact Sam Fletcher at [email protected]