The front-month crude contract jumped to record highs above $75/bbl as the New York market reopened July 5 after the US Independence Day holiday amid rising demand for oil in the US and China and fears of supply disruptions in the Middle East, Nigeria, and the Gulf of Mexico.
The August contract for US sweet, light crudes closed at a record high of $75.19/bbl after trading at an all-time high of $75.40/bbl for a front-month contact during the July 5 session on the New York Mercantile Exchange. The closing price dipped to $75.14/bbl July 6 after the Energy Information Administration reported US crude inventories dropped 2.4 million bbl to 341.3 million bbl in the week ended June 30. However, US gasoline stocks rose by 700,000 bbl to 213.1 million bbl in the same period. Wall Street analysts were expecting an 800,000 bbl decline in gasoline, however.
Imports of crude into the US slipped by 7,000 b/d to 10.5 million b/d in the week ended June 30. Input of crude into US refineries fell by 184,000 b/d to 15.9 million b/d with units operating at 93.1% of capacity, down from 93.8% previously, because of the oil spill in the Calcasieu Ship Channel that disrupted operations at four refineries near Lake Charles, La. (OGJ Online, July 3, 2006).
The rise in gasoline stocks was due to a 300,000 b/d increase in gasoline imports, said Jacques Rousseau, senior energy analyst at Friedman, Billings, Ramsey Group Inc., Arlington, Va. Government data showed increased growth in demand for gasoline, 1.3% above year-ago levels over the 4 weeks through June 30 vs. 0.8% through the 4 weeks ended June 23. "We expect positive momentum to continue in the sector through July due to strong refining margins and since many refiners should report record quarterly earnings for the second quarter," Rousseau said. Total refined product demand in the latest period increased by 200,000 b/d primarily because of increased consumption of gasoline and jet fuel. Total production of refined products was down by 100,000 b/d.
Record gasoline demand
"With just one day of the initial June data yet to come, US gasoline demand for the month stands at 9.502 million b/d. That is the highest level ever recorded for any month," said Paul Horsnell, Barclays Capital Inc., London, in a July 7 report. "To have demand rise by 1.3% in the face of a sustained 30% plus rise in prices implies that the short-run sensitivity to price is pretty low and that the sensitivity to income growth is pretty high."
For 11 consecutive weeks through July 7, the US retail pump price for regular unleaded gasoline averaged $2.86-$2.95/gal. "This has meant that the impact of gasoline prices on monthly price indices has been very benign recently," Horsnell said. However, he said, "The magic range is likely to be broken fairly swiftly, with the average likely to head on up to and beyond $3/gal." But he expects little reaction from US motorists. "Prices close to $3 are establishing themselves as a norm, and a return to that average is unlikely to bring about the fuel-saving experiments that occurred in the wake of the hurricanes [in August-September 2005]. People tried car-sharing back then, and most seem to find that they did not like it very much," he said.
On July 6, the August natural gas contract lost 10.1¢ to $5.66/MMbtu on NYMEX, nearing a 2-year low as US storage increased. EIA reported injection of 73 bcf of gas into US underground storage in the week ended June 30, up from 66 bcf the previous week and a revised injection of 65 bcf during the same period last year. US gas storage exceeded 2.6 tcf, up by 424 bcf from year-ago levels and 591 bcf above the 5-year average.
"The oil-to-gas parity ratio has gone haywire at 13.3:1 due to geopolitical and macroeconomic factors boosting crude, and inventory surplus and mild weather concerns weighing down heavily on natural gas," said analysts in the Houston office of Raymond James & Associates Inc. "The crude-to-gas price ratio has not been so high since 1995."
Traders on NYMEX have "already priced in record high summer-ending storage levels and bearish scenarios for even the 2006-07 winter-ending storage," said Raymond James analysts. "We foresee the downside from these levels to be quite limited and would like to highlight the numerous catalysts that should work to push up natural gas prices: normal summer weather, hurricanes, more switching, and return of price-sensitive demand."
(Online July 10, 2006; author's e-mail: [email protected])