Crude prices seesaw

May 26, 2006
Crude prices shot past $71/bbl May 23 with predictions of another strong hurricane season, then fell below $70/bbl in the next session.

Sam Fletcher
Senior Writer

Crude prices shot past $71/bbl May 23 with predictions of another strong hurricane season, then fell below $70/bbl in the next session because of a bigger-than-expected build in US gasoline inventories just prior to the start of the summer driving season.

The June natural gas contract dropped below $6/MMbtu May 24 on the New York Mercantile Exchange in anticipation of a government report of another large build in US gas storage. The Energy Information Administration reported May 25 the injection of 83 bcf of gas into US underground storage during the week ended May 19. That was below the consensus of Wall Street analysts and down from injections of 91 bcf the previous week and 93 bcf during the same period last year. US gas storage stood at 2.2 tcf, up by 484 bcf from a year ago and 716 bcf above the 5-year average.

"Just when it looked like the market had carved out a seasonal bottom and set its sights on higher prices, the June contract, 2 days short of expiration, broke back below $6 in a convincing fashion," said analysts at Enerfax Daily.

"Forget $70/bbl oil prices; natural gas concerns continue to drive the market (which may be the case throughout the summer)," said J. Marshall Adkins in the Houston office of Raymond James & Associates Inc. "The question of the day (and probably the next several months) is where will gas bottom out? Our answer: when demand finally responds. We're going to need strong year-over-year demand growth to signal to the market that record high storage will not kill gas prices. Look for more volatility with each new data point."

US inventories
EIA earlier said US gasoline inventories jumped by 2.1 million bbl to 208.5 million bbl in the week ended May 19. Commercial stocks of US crude dropped 3 million bbl to 343.9 million bbl during the same week. Distillate fuel stocks increased, however, by 2.5 million bbl to 117.1 million bbl, with increases in both diesel fuel and heating oil. "Crude oil fell much more than expected," said Adkins. "Both gasoline and distillate inventories increased more than anticipated."

US imports of crude fell by 826,000 b/d to 9.6 million b/d in the period through May 19. Total gasoline imports averaged more than 1.6 million b/d, the second highest weekly average ever, said EIA officials. The input of crude into US refineries dipped by 3,000 b/d to 15.3 million b/d, with refineries operating at 89.7% of capacity. Gasoline production remained relatively flat at 9.2 million b/d, while distillate fuel production increased to 4.1 million b/d. "Refinery utilization was down marginally, and the Strategic Petroleum Reserve did not build [in the latest] week," Adkins said.

Other factors
The National Oceanic and Atmospheric Administration is predicting 13-16 tropical storms will form in the North Atlantic this season, with 8-10 developing into hurricanes, 4-6 of which are likely to be major storms. That's not as severe as the 2005 hurricane season, but it's harsh enough to remind traders that crude and gas production is susceptible to unexpected disruptions.

Oil and gas operations in the Gulf of Mexico and along the US Gulf Coast still haven't fully recovered from Hurricanes Katrina and Rita in August and September 2005. Shell Exploration & Production Co. said May 22 that partial production had resumed from its Mars tension-leg platform, the largest producing platform in the gulf. It had been shut-in since being damaged by Hurricane Katrina in late August.

It was repaired by a workforce that often exceeded 500 people daily, representing over 1 million man-hr of labor. It was one of the "most technologically complex operations in the world" and was completed "safely and ahead of schedule," said Shell officials. Mars production is to ramp up during the next several weeks and is expected to be back to prehurricane levels by the end of June. Shell operates the Mars platform with a 71.5% working interest, with the remaining interest held by BP PLC.

Meanwhile, Adkins said, "Various international supply disruptions (especially in Iraq and Nigeria), coupled with escalating geopolitical risk (especially involving Iran), are likely to keep oil prices at notably elevated levels at least through 2007. In fact, recent data suggests that OPEC production has fallen nearly 1 million b/d over the past several months. Because of this 'de facto' OPEC production cut, the oil market now appears substantially more balanced than it did just a few months ago."

(Online May 15, 2006; author's e-mail: [email protected])