A December run for $100/bbl oil

Dec. 31, 2007
With many observers convinced they had seen the last major run up in oil prices for 2007, the market mounted another run at $100/bbl crude in late December.

Sam Fletcher
Senior Writer

With many observers convinced they had seen the last major run up in oil prices for 2007, the market mounted another run at $100/bbl crude in late December.

The January contract for benchmark US light, sweet crudes dropped $9.47/bbl during the last five trading sessions of November, finishing the month at $88.71/bbl on the New York Mercantile Exchange. It fluctuated at $87-90/bbl until Dec. 12 when it jumped $4.37 to $94.39/bbl, the biggest one-day gain since Jan. 30 and then the highest closing since Nov. 27 on NYMEX, after the US Federal Reserve offered to $24 billion to the European Central Bank and Swiss National Bank to spur economic growth.

However, that price gain was followed by a losing streak over the next four NYMEX sessions that reduced the January crude contract to $90.49/bbl by Dec. 18. Then it escalated to $91.24/bbl Dec. 19 as the Energy Information Administration reported US crude inventories fell to the lowest level since February 2005, down 7.6 million bbl to 296.9 million bbl in the week ended Dec. 14 vs. a consensus among Wall Street analysts of a smaller drop of 1.4 million bbl. On Dec. 20, the NYMEX price slipped to $91.06/bbl. But that was followed by consecutive increases over the four sessions on Dec. 21, Dec. 24, and Dec. 26-27 to $93.31/bbl for the new front-month February contract. That contract soared as high as $97.92/bbl in electronic premarket trading Dec. 28 before profit taking dropped it to a closing price of $96/bbl.

Still, Paul Horsnell at Barclays Capital Inc., London, said, "The most relevant question about $100/bbl [price for crude] is when and not if."

Crude prices climbed in late December in the New York market with the escalation of geopolitical tensions as the Turkish military said it would continue attacks against Kurdish rebels across the boarder into northern Iraq. Even more distressful was the assassination of former Pakistani Prime Minister Benazir Bhutto and at least 20 other people by a suicide bomber at a political rally in Pakistan. Pakistan is not a major oil producer but it does have nuclear weapons and ties to radical Muslims, which could be a factor in a Middle East dispute.

Crude stocks tighten
At the same time, EIA reported another major drop in commercial US crude inventories, down 3.3 million bbl to 293.6 million bbl in the week ended Dec. 21. US gasoline stocks increased by 700,000 bbl to 205.9 bbl in the same period, while distillate fuel fell 2.8 million bbl to 126.6 million bbl. "US crude oil inventories have fallen further below their 5-year average, having now fallen in absolute terms by more than 60 million bbl since the end of June," Horsnell said. US crude stocks "are still falling relative to normal seasonal patterns despite the continuation of low refinery utilization rates," he said. "What was, as recently as July, a 40 million bbl build in total US oil inventories above their 5-year average has now disappeared completely. Crude inventories at Cushing, Okla., have not managed to achieve the usual scale of end-year seasonal build, and they are ending 2007 at a level some 33% lower than that at which they ended 2006."

The latest implied gasoline demand is 9.446 million b/d—"the highest figure since the seasonal peaks in August and enough to turn what had been a year-over-year decline for December-to-date into a year-over-year increase," Horsnell said. "Despite a 25% rise in retail prices and gathering economic pessimism, US gasoline demand now looks set to record the 26th straight month of year-over-year increases. Distillate demand for December-to-date is running close to the all-time high for any month, with a very strong 7.1% year-over-year increase."

The latest EIA petroleum data "showed an overall decline to refined product inventories, which is not typical for this time of year. The inventory drawdown was driven by the highest weekly demand level since February 2007, which is most likely a one time event due to holiday travel," said Soleil-Back Bay Research analyst Jacques H. Rousseau. Gasoline supply remains below average, "which could be the result of some refiners operating below capacity due to weak margins and because of lower imports due to a narrow US East Coast vs. Europe arbitrage spread," said Rousseau. "We remain cautious on the near-term outlook for the sector and believe that consensus earnings expectations for the fourth quarter of 2007 are too high, but we expect refining margins to rebound heading into the 2008 driving season."

(Online Dec. 31, 2007; author's e-mail: [email protected])