Loss followed record-high prices

The front-month crude contract ended the trading week through Aug. 3 with a 2% loss after setting record highs in earlier sessions on the New York market.

Sam Fletcher
Senior Writer

The front-month crude contract ended the trading week through Aug. 3 with a 2% loss after setting record highs in earlier sessions on the New York market.

The September contract for US light, sweet crudes hit an intraday high of $78.28/bbl July 31 on the New York Mercantile Exchange, buoyed by news that US consumer confidence hit a 6-year high in the second quarter. It closed at a record high of $78.21/bbl, up $1.38 for the same day. The previous record closing for a front-month crude contract was $77.03/bbl on July 14, 2006, the same day that the intraday trading set a record of $77.95/bbl.

The crude contract continued climbing in early trade Aug. 1, setting an all-time high of $78.77/bbl on NYMEX. That surpassed the previous high of $78.40/bbl in electronic trading prior to a regular NYMEX session in mid-July of last year. But then the Energy Information Administration reported Aug. 1 a larger-than-expected draw of US crude inventories and large builds in gasoline and distillate fuel stocks during the week ended July 27. That triggered a sell-off that wiped out gains from the July 31 session, with benchmark September crude down to $76.53/bbl by the end of the day.

The contract rebounded to close at $76.86/bbl on Aug. 2 when members of the Organization of Petroleum Exporting Countries reiterated that they see no need to produce more oil when US inventories are 12% above the 5-year average and US refining capacity remains constrained. On Aug. 3, the contract had declined to $75.48/bbl at closing, amid rising fears on Wall Street of a downturn in economic growth.

The front-month crude contract "managed to print a new historical high but it was followed by a quick reversal that brought West Texas Intermediate down for the first week of the last 8" on the New York market, said Olivier Jakob, managing director of Petromatrix GMBH, Zug, Switzerland. At the end of the week, the crude contract was down $1.54/bbl, reversing the gains of the previous week, while North Sea Brent crude was down a second week in a row, losing $1.51/bbl during the week. The front-month contract for reformulated blend stock for oxygenate blending (RBOB) was down for the fourth consecutive week, and heating oil posted a loss for the third week in a row, Jakob reported.

Energy inventories
US gasoline inventories rose by 600,000 bbl to 204.7 million bbl in the week ended July 27, bigger than Wall Street's expectation for a 100,000 bbl build. Distillate inventories rose by 2.8 million bbl to 126.5 million bbl, compared with a consensus expectation for a 1.3 million bbl build. Crude oil inventories fell by 6.5 million bbl to 344.5 million bbl, well beyond the consensus expectation for a 1.1 million bbl drawdown.

Imports of crude into the US declined by 213,000 b/d to 10.2 million b/d in the week ended July 27. Gasoline imports dropped to 1.2 million b/d from the prior week's record 1.7 million b/d. Distillate fuel imports averaged 339,000 b/d. The input of crude into US refineries increased by 388,000 b/d to 16.2 million b/d in the week ended July 27, the largest input since the week ended Aug. 26, 2005, EIA said.

Analysts at Raymond James & Associates Inc. see signs that OPEC ministers may increase production at their Sept. 11 meeting if crude prices rise too high. If OPEC maintains its current production quota, however, that could result in a fourth-quarter decline in supplies, driving prices up. Raymond James said OPEC production actually increased in July by 850,000 b/d, including a 150,000 b/d hike in Nigeria and an 800,000 b/d decrease in Iran.

At the time of EIA's Aug. 1 report, crude inventories at the key pipeline delivery center in Cushing, Okla., had fallen for 10 consecutive weeks. Jakob said, "The weekly statistics were a reminder that, if underlying demand is not strong enough, a crude oil draw translates into a product build. In July for total products and crude combined, there was a build of 8 million bbl. Gasoline production reached a new record high and is 400,000 b/d higher than the same week last year, while middle distillate production is higher by 490,000 b/d. Refinery runs have [increased] and at the current levels of runs and of imports would cause further severe crude draw downs."

However, he cautioned, "We are starting from US crude stock levels at multiyear highs, and it remains to be seen how long runs can be maintained at the levels of last week when margins are at fall levels and product demand remains moribund."

(Online Aug. 6, 2007; author's e-mail: samf@ogjonline.com)

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