Inventories vs. possible disruptions

April 3, 2006
Energy prices see-sawed, down one day and up the next through the week ended Mar. 24 as traders worried about high US inventories vs. possible supply disruptions later this year.

Energy prices see-sawed, down one day and up the next through the week ended Mar. 24 as traders worried about high US inventories vs. possible supply disruptions later this year.

“West Texas Intermediate spot crude oil prices began the week by posting the largest 1-day decline in 7 months but then rebounded due to further supply disruptions in Nigeria and concerns regarding reformulated US gasoline supplies heading into the summer driving season,” said Robert S. Morris at Banc of America Securities LLC, New York. The end result was a 1% increase in both WTI spot oil and composite spot natural gas prices by the end of the week.

Nigeria’s oil ministry had planned to resume production of 75% of its shut-in crude by Mar. 24 (OGJ Online, Mar. 9, 2006). But Royal Dutch Shell PLC subsequently said it would not resume production from the Niger Delta until that area is safe from attacks and kidnappings by militants. Officials reported 630,000 b/d, or 26% of Nigeria’s crude production, has been shut in by sabotage and threats of additional attacks. That includes 455,000 b/d shut in by Shell. Nigerian militants freed three foreign oil workers after 3 weeks of captivity, but continued turmoil is expected.

Phase-out of methyl tertiary butyl ether as a gasoline blending component in the US beginning May 6 is “still a concern as many believe that there will be regional disruptions or shortages of ethanol during the transition,” Morris said.

In the latest report prior to presstime for this issue, the US Energy Information Administration said commercial US crude inventories fell by 1.3 million bbl to 338.6 million bbl during the week ended Mar. 17. US gasoline stocks dropped 2.3 million bbl to 221.6 million bbl, while distillate fuel declined by 800,000 bbl to 126.7 million bbl during the same period (OGJ Online, Mar. 23, 2006). EIA also reported withdrawal of 23 bcf of gas from underground storage in the week ended Mar. 17, leaving storage at 1.8 tcf, up by 506 bcf from a year ago and 724 bcf above the 5-year average.

Led by the gasoline market, crude and refined product prices initially fell Mar. 22 after that report of unexpectedly lower inventories. But by the next session, the delayed reaction turned bullish, with futures prices for both crude and petroleum products continuing to climb Mar. 24. “With the summer driving season quickly approaching, [the] larger-than-expected decline in gasoline inventories should be positive for refining margins,” said Jacques Rousseau at Friedman, Billings, Ramsey & Co. Inc., Arlington, Va. “The industry average utilization rate rose from 85.7% to 86.7% but remains below historical averages,” Rousseau said in a refining report. He noted that the shutdown for unexpected repair of a 150,000 b/d gasoline-producing unit at the St. Croix refinery that Amerada Hess Corp. owns with Petroleos de Venezuela SA lowered US gasoline imports. The unit was expected to restart soon (OGJ Online, Mar. 15).

Meanwhile, Morris noted, “After more than 2 weeks of discussions, the five veto-wielding members of the UN Security Council have not been able to reach an agreement regarding a draft statement that calls for Iran to cease uranium enrichment with Russia and China pushing for more diplomacy to resolve the nuclear stand-off.”


The 2005 Atlantic hurricane season produced a record 27 named storms, of which 15 developed into hurricanes including 6 that hit the US and 7 classified as major hurricanes. The 2006 hurricane season is not expected to match that record. However, Ronald J. Barone, managing director of equity research for the Natural Gas & Electric Utilities Group of UBS Securities LLC, New York, said, “Quantity is not the most important factor as it only takes one hurricane of high intensity making landfall to wreak havoc.”

On Mar. 22, the US Minerals Management Service reported 22.9% of the crude and 13.9% of the natural gas usually produced from federal leases in the Gulf of Mexico were still shut in because of the damage inflicted by Hurricanes Katrina in August and Rita in September (OGJ Online, Mar. 23, 2006).

The American Petroleum Institute reported US refinery utilization averaged 87.1% during February, the lowest level for that month since 2002, with product inventories falling as production slowed. “Two [storm-damaged] refineries remained offline in February, 6 months after the first of two hurricanes slammed into the Gulf Coast,” the association noted. It said another refinery, in Louisiana, that began its restart process in January had not yet returned to full operation. Those three refineries represented 5% of domestic refining capacity (OGJ Online, Mar. 15, 2006.)

(Online Mar. 27, 2006; author’s e-mail: [email protected])