Gasoline supply suppresses energy prices

Feb. 20, 2006
Energy futures prices across the board were falling Feb. 8 following a report that US gasoline inventories had soared to an 11-month high.

Energy futures prices across the board were falling Feb. 8 following a report that US gasoline inventories had soared to an 11-month high.

The Energy Information Administration said US gasoline stocks jumped by 4.3 million bbl to 223.3 million bbl during the week ended Feb. 3 (OGJ Online, Feb. 8, 2006). Traders had expected the EIA to report another build in US crude inventories. It said instead that commercial US crude inventories dipped by 300,000 bbl to 320.7 million bbl during the week. Distillate fuel stocks also fell by 300,000 bbl in the same period, to 136 million bbl with a large decline in heating oil overcoming an increase in diesel fuel.

US imports of crude increased by 264,000 b/d to 9.9 million b/d that week. But crude imports over 4 consecutive weeks through that period averaged 9.6 million-down by 156,000 b/d from the comparable period in 2005, EIA reported. Input of crude into US refineries declined by 203,000 b/d to 14.5 million b/d in the week ended Feb. 3. With some units down for routine maintenance, refineries operated at 85.8% of capacity during the week. Gasoline production declined while production of distillate fuel increased slightly, EIA said.

Earlier, EIA reduced its forecast of global oil demand during the first quarter of 2006 by 300,000 b/d to 85 million b/d. It lowered its forecast of US oil demand for the same period by 220,000 b/d to 20.67 million b/d.

Inventory outlook

Nearly half of the latest build in US gasoline inventories was due to a big 290,000 b/d increase in imports from year-ago levels, said Jacques Rousseau at Friedman, Billings, Ramsey & Co. Inc., Arlington, Va. “However, we expect imports to decline over the coming weeks as European refined-product markets continue to tighten due to increased demand resulting from the eastern hemisphere’s record cold winter. Additionally, with this year’s heavier-than-normal [refinery] turnaround season, domestic production should decline ahead of the summer driving season,” Rousseau said.

Paul Horsnell of Barclays Capital Inc., London, said, “We do not expect to see any sustainable move below $60[/bbl] in the current swing down” of crude prices. For the moment, he said, “Geopolitical issues have moved away from the market’s immediate attention. However, we see developments as pointing to an increasing probability of the Iranian nuclear issue producing a nonbenign outcome for the oil market.”

Horsnell noted a “perceived temporary imbalance between crude oil and oil products in the prompt market.” Especially in the US, he said, “That imbalance is most marked in the case of gasoline. What the market is trying to achieve through price signals is, then, to tighten oil product markets relative to crude oil; to tighten gasoline relative to other products; to defer deliveries along the curve; and to reduce the scope for arbitrage of oil products into the US.”

The primary problem is not an excess of crude, since those inventories haven’t changed much in recent months. “Instead, the root has been an overstimulation of refinery activity at the global level, which has teased out virtually all of the remaining spare capacity on stream, and which has led to the deferral of normal maintenance patterns. To reflect the need for an adjustment from that situation, refinery margins are currently being severely depressed,” Horsnell said. “A strong signal is being sent for refineries to now begin what is expected to be a heavier-than-usual maintenance period.”

EIA reported Feb. 9 the withdrawal of 38 bcf of natural gas from US underground storage in the week ended Feb. 3 vs. withdrawals of 88 bcf the previous week and 176 bcf during the same period in 2005. Storage now stands at 2.4 tcf of natural gas, up by 437 bcf from year-ago levels and 649 bcf above the 5-year average.

“This week’s lower-than-expected withdrawal was essentially all in the producing region, which, similar to the last week of December and first week of January, most likely reflects the significant lack of demand due to mild weather,” said Robert S. Morris at Banc of America Securities LLC, New York.

Gas prices remained below residual fuel oil prices along the Gulf Coast, which could prompt further fuel switching. Switching from residual fuel oil to gas in three key regions (Gulf Coast, Northeast, and Southeast) could add up to 2 bcfd of incremental gas demand. “Gas is a cleaner-burning fuel and does not require electricity producers to deplete their valuable emission allocations [or] credits as quickly,” Morris said.

(Online Feb. 13, 2006; author’s e-mail: [email protected])