Crude prices plummet from record highs

April 18, 2005
Crude and gasoline futures prices plummeted during the week ended Apr. 8 from new highs hit Apr.

Crude and gasoline futures prices plummeted during the week ended Apr. 8 from new highs hit Apr. 1 in the wake of a report by Goldman Sachs Group Inc., New York, that crude could jump to $75/bbl in 2006 and spike at $105/bbl in 2007 before plunging back to $30/bbl by 2010.

The Goldman Sachs equity team on Mar. 31 hiked its “super spike” estimate to $50-105/bbl, from $50-80/bbl previously, because of continued strength in world oil demand and economic growth (OGJ Online, Apr. 1, 2005). As traders reacted to that speculation, benchmark US light, sweet crudes for September delivery hit a new intraday high of $60.03/bbl on the New York Mercantile Exchange, while the May position set new front-month intraday and settlement records of $58.28/bbl and $57.27/bbl, respectively. Gasoline for May delivery topped out at a new high of $1.76/gal prior to settling at $1.73/gal on NYMEX.

Prices fall

However, prices fell after members of the Organization of Petroleum Exporting Countries began talking of hiking the group’s output ceiling by another 500,000 b/d in May (OGJ Online, Apr. 4, 2005). Prices for the May contract of benchmark US crudes plunged by 6.9% to end the week at $53.32/bbl on NYMEX and were reported at a 1-month low under $53/bbl in early trading on Apr. 11.

The drop in oil prices during the week ended Apr. 8 “was underscored by reports that Saudi Arabia is telling customers it will produce at capacity, if needed, to build inventories to sufficient levels to meet the projected uptick in oil demand in the fourth quarter,” said Robert S. Morris, Banc of America Securities, New York. “OPEC estimates that the call on its output (excluding Iraq) will rise to 30.3 million b/d in the fourth quarter vs. 27.7 million b/d in the second quarter, although the organization’s total production capacity is believed to now be around 29 million b/d (excluding Iraq). As a result, several OPEC members have recently stated that they also are pushing ahead with projects to add 1 million b/d.”

Analysts in the Houston office of Raymond James & Associates Inc. said, “While OPEC is clearly concerned about the price spike year-to-date, its power to cool down the market is quite limited. What matters is not the number on paper but OPEC’s actual production.”

They said, “All members except Saudi Arabia have been producing at or very close to capacity for months, and this status quo will almost certainly not change anytime soon. Accordingly, the oil market can be expected to stay tight over the foreseeable future.”

Previous escalation of crude prices “attracted enough imports in recent months to build [US] stockpile levels to their highest since 2002, when oil prices were around $20/bbl, to counter irrational fears of a imminent global supply shortage. Oil prices have gone up 25% since the year began and are 50% higher than a year ago,” said analysts at Enerfax Daily (OGJ Online, Apr. 7, 2005). They predicted, “Prices will likely drop back lower than many expect but not stay put. The next time up, the prices will go quicker and higher.”

Natural gas outlook

The US Energy Information Administration on Apr. 7 reported the first injection of natural gas into US underground storage for this season, an input of 10 bcf in the week ended Apr. 1. That raised US natural gas storage to 1.2 tcf, which was 218 bcf more than a year ago and 227 bcf above the 5-year average.

That “appears to reflect some incremental backed-out demand versus the prior week, although the correlation to heating degree days weakens as winter comes to an end and the shoulder period begins,” said Morris. “We believe the slightly higher than expected injection likely reflected the strong economic incentive for operators [and] speculators to inject gas into storage.” Morris foresees US supply and demand for natural gas in balance this summer, “with storage being refilled to around 3.25 tcf at the start of next winter.”

However, Raymond James analysts said, “Over the past year, abnormal weather has driven average gas storage levels to the high end of their historical range.” If US weather had been closer to normal, they said, “gas storage would currently be at the lower end of its historical range. In other words, weather has hidden the fact that the US gas market is actually tighter than many believe.” Tightness in the gas market “should begin to show up as we move through the heat of the summer,” they said.

(Online Apr. 11, 2005; author’s e-mail: [email protected])