FUTURES MOVERS - Terminal fire highlights tight supplies - Heating oil nears all-time high; natural gas jumps 7%

cbs.marketwatch.com By Myra P. Saefong, CBS.MarketWatch.com Last Update: 3:34 PM ET Feb. 21, 2003

NEW YORK (CBS.MW) -- A fire at a Staten Island fuel storage facility put U.S. energy supplies clearly in the spotlight Friday, pulling heating oil within pennies of its all-time high and natural gas to the highest price level seen in two years.

The "bottom line is that even without the fire, inventories are falling and tightening at a rapid pace," said Michael Armbruster, an analyst at Altavest.com. A fire "can only exacerbate that," he said.

Distillate inventories fell just about 4 percent in the last week, following three weeks of significant draws, Armbruster noted.

Market sources confirmed that more than 50 percent of the heating oil used in U.S. comes through the Arthur Kill waterway, separating New York's Staten Island and outlying New Jersey communities.

The fire erupted Friday morning, prompting the closing of the waterway while authorities conducted an investigation. New York Mayor Michael Bloomberg characterized it as an accident during a press conference.

"It is a vast storage and production site," said John Person, analyst with Infinity Brokerage Services, noting that the Arthur Kill area is a key artery for shipping fuel along the Eastern Seaboard and the Intracoastal Waterway.

On the New York Mercantile Exchange, heating oil for March delivery rose to an intraday high of $1.12 per gallon, pennies shy of the all-time futures high of $1.147 a gallon seen in April 1981, according to Alaron.com senior analyst Phil Flynn. The contract then fell back to close at $1.1085 a gallon, up by 4.98 cents, or 4.7 percent.

Other fuel contracts moved higher as well, including March natural gas, which rose as high as $6.70 per million British thermal units -- a level not seen since $7.10 reached in February 2001. It closed at $6.606, up 44.4 cents, or 7.2 percent.

Crude for April delivery touched $36 a barrel before easing back to close at $35.58, up 84 cents, while March unleaded gasoline closed at $1.012 a gallon, up 4.62 cents, after climbing as high as $1.017.

"Between the Iraqi situation, Venezuelan unrest, oil-worker union demands in Nigeria and now an explosion at a storage facility, the supply side of the energy equation continues to have nothing but bad luck," said Grady Garrett, chief trading strategist at EnergyTrendAlert.com.

The Port Mobil distribution terminal belongs to ExxonMobil (XOM: news, chart, profile) and reportedly has a capacity of 2 million barrels in 39 tanks, market sources said.

"In this volatile environment, anything that could be construed as having the potential to disrupt supplies will send prices higher," said Thorsten Fischer, an economist at Economy.com.

Fears of terrorism "probably caused some market overreaction," he added. Authorities have said there are no indications of terrorism.

ExxonMobil said the explosion occurred during the offloading of a barge containing 100,000 barrels of unleaded gasoline. At least one person was killed. See full story.

"The refinery explosion is a dramatic setback and one more event that will support the outlook for continued price advances in the energy complex," Person said.

Tight by any definition

The nation's crude inventories remain mired around 270 million barrels -- the minimum level required to keep refineries operating normally.

Early Thursday, the Energy Department said the nation's inventories of crude oil rose by 3.1 million barrels in the week ended Feb. 14, compared with the prior week. The American Petroleum Institute reported a 3.3 million-barrel decline in crude stocks.

But aggregate crude stocks stood at 272.9 million and 268.3 million barrels, according to the Energy Department and API, respectively.

And on a year-over-year basis, crude inventories are down more than 15 percent, the equivalent of 50.4 million barrels, the government report said. The previous week, the Energy Department reported its lowest level for inventories in 27 years -- just under 270 million barrels.

Distillate inventories declined by 3.2 million to total 107 million barrels, while gasoline supplies fell by 1.8 million to 210.7 million barrels, the API said.

The Energy Department reported a 4.6 million-barrel contraction in supplies of distillates, to 103.6 million barrels. And gasoline fell by 1.4 million barrels to 211.2 million barrels in the latest week. See full story.

In spite of supply-constricting developments in Venezuela and elsewhere, the Energy Department appears of the view that there is no shortage of crude oil, said Tim Evans, senior analyst at IFR Pegasus.

But Evans believes the Energy Department fears a further price spike and doesn't want to be blamed for contributing to it. "As they said in their report, the market is in 'a delicate balance' indeed," he told clients Friday.

'Very nervous' over Iraq

Further pinching on the supply situation, the market remains concerned that a U.S.-led war with Iraq is imminent.

"Traders are very nervous as prices are very high and the U.S.-Iraqi prewar diplomatic 'dance' seems to be reaching a crescendo," said EnergyTrendAlert.com's Garrett.

Infinity Brokerage's Person further emphasized the prospect of higher prices ahead by noting that "if supplies in a non-wartime environment are at nearly three-decade lows, what will happen if the U.S. does go into action?"

Cargo and oil shipments form the Middle East would be detained, causing delays of needed supplies and pulling prices even higher, he said.

Late Thursday, U.S. Defense Secretary Donald Rumsfeld told the PBS program "Newshour with Jim Lehrer" that U.S. troops are ready to attack Iraq if and as soon as President Bush gives the order. See Special Report: Countdown to War.

Supportive data for natural gas

In other energy trading, natural-gas futures hit fresh two-year highs on the back of the rally in petroleum futures and a larger-than-expected decline in natural-gas supplies. Renewed expectations for cold weather also provided a supportive backdrop.

Natural gas is certainty feeding off the rally in petroleum futures, said Altavest.com's Armbruster, but natural gas has its own tight supply situation to worry about.

U.S. supplies have fallen by about 1 trillion cubic feet in the last five weeks, he said.

The combination of declining inventories and falling production is pulling prices higher, said Armbruster, adding that there's "very good reason to look for natural gas to go significantly higher in next month or so."

On Thursday, the Energy Department reported a 203 billion cubic fall in inventories as of Feb. 14.

By two key measures, total inventories of 1.168 trillion cubic feet are significantly lower -- 868 billion cubic feet less than the year-ago level and 436 billion cubic feet below the five-year average, the government said.

IFR Pegasus was looking for a decrease of 150 billion to 170 billion cubic feet. A year earlier, stocks contracted by 124 billion cubic feet.

"It looks like there is enough cold in the forecast to also contribute to further market strength here," said IFR Pegasus' Evans.

The National Weather Service calls for below-normal temperatures in western states and the Northeast next week, he said, with above-normal temperatures seen as likely in the Southeast.

Also on Nymex, gold futures prices traded modestly lower Friday with traders focused on watching the U.S. dollar and developments overseas. See Metals Stocks.

In the equities arena, most oil-service shares traded higher. The Philadelphia Oil Service Index ($OSX: news, chart, profile) rose more than 3 percent. See Energy Stocks.

The Reuters/CRB Index, a broad-based measure of the commodity futures market, closed at 248.1, up 0.7 percent on strength in the energy commodities. Myra P. Saefong is a reporter for CBS.MarketWatch.com in San Francisco.