Market watch: Energy futures prices plunge with inventory increase

<a href=ogj.pennnet.com>Oil&Gas Journal Sam Fletcher Senior Writer

HOUSTON, Apr. 3 -- Energy futures prices continued to plunge Wednesday, as reports of increased US oil inventories triggered additional selling among optimistic traders.

The US Department of Energy reported US crude inventories "built substantially," up 6.8 million bbl to 280.7 million bbl during the week ended Mar. 28, with higher imports "more than offsetting" a 400,000 b/d increase in refinery runs. "Although the (American Petroleum Institute) reported a more substantial build of 9 million bbl, the two reports essentially resulted in the same level of absolute stocks at 281millon bbl," said Matthew Warburton with UBS Warburg LLC, New York.

Oil imports Warburton reported US oil imports surged to a record 10.36 million b/d during the last week of March, primarily due to the arrival of cargoes from Saudi Arabia. But he and other analysts noted that increased shipments of heavy, sour oil from Venezuela and Saudi Arabia can't offset interrupted supplies of light, sweet Nigerian crude.

Moreover, Paul Horsnell, analyst for J.P. Morgan Securities Inc., London, noted, "Current arrivals of crude represent a time of loading when Nigeria and Iraq were at full (export) capacity. Given that, it is by no means clear that imports can be maintained above 10 million b/d throughout (the second quarter), once the cushion of extra oil in the supply chain over the next few weeks begins to abate."

Horsnell said, "More Saudi oil would be a poor quality substitute for Nigerian supplies, especially given the current imperative for refineries to produce higher gasoline yields."

Warburton agreed, "Prolonged reduction in Nigerian export volumes could become increasingly critical to summer production given its gasoline-rich composition." He noted that, in the latest reported period, "Gasoline inventories increased by 1.7 million bbl, driven primarily by high imports and subdued demand, but most of the increase was in other finished gasoline and blending components, offsetting a modest further fall in RFG (reformulated gasoline) inventories."

"The stubbornness of oil product deficits is of some concern," said Horsnell. "For the first time since the inventory deficit first opened up 9 months ago, more than half of that deficit is in oil products."

Therefore, he said, "It will not matter how fast crude oil piles up if the system is having difficulty refining it fast enough. We still believe that the US market will have difficulty in avoiding a significant gasoline price spike this summer, as the task of playing catch up with inventory cover is one that the US refining system has recently proven extremely poor at achieving."

Meanwhile, Horsnell said, "Some traders seem to believe that $20/bbl is the inevitable and immediate result of an outcome in Iraq, and many are still expecting a magic spigot to sharply and swiftly increase Iraqi exports. Our position remains that the fundamentals do not support prices in the low $20s; that significant Iraqi exports are unlikely this quarter and in some doubt for next quarter; and that it would be a supreme achievement to merely stabilize Iraqi production over a 2-year period."

Energy prices The May contract for benchmark US sweet, light crudes plummeted by $1.22 to $28.56/bbl Wednesday on the New York Mercantile Exchange, while the June position fell $1.02 to $27.21/bbl. Unleaded gasoline for May delivery plunged 5.03¢ to 86.39¢/gal. Heating oil for the same month dropped 2.23¢ to 71.86¢/gal.

The May natural gas contract lost 6¢ to $5.07/Mcf on NYMEX. "Limited short-covering pushed the market above key $5(/Mcf) support. Limited short-covering is the only way the market will strengthen for now," gas market analysts said Thursday at Enerfax Daily. "The market still faces near record-low storage inventories."

The US Energy Information Administration reported Thursday a 37 bcf injection of natural gas into US underground storage last week. That compares with an injection of 7 bcf the previous week and the withdrawal of 61 bcf during the same period last year. At the end of the traditional withdrawal season, US storage stands at 680 bcf. That's 820 bcf less than at the same time a year ago, and 506 bcf below the 5-year average.

A recent study by C.H. Guernsey & Co., Oklahoma City, concluded that more than 2.2 tcf of natural gas must be injected into underground storage from now through October to get even close to a 3 tcf "comfort level" by Nov. 1. Net gas injections through the summer of 2002 totaled less than 1.7 tcf.

Such demand is certain to impact US natural gas prices "throughout the summer and into next winter," said Guernsey officials.

"We believe that natural gas prices will regain momentum with the onset of summer as it becomes apparent. . .that significant demand needs to be 'backed out'. . .to attain a reasonable storage level entering next winter," said Robert S. Morris, energy analyst for Banc of America Securities LLC, New York, in a separate report Wednesday. He said an average gas price of $5-5.50/Mcf—"more likely higher than lower" —will be necessary to back out 5 bcfd of gas demand "in order for storage to just reach (2.75 tcf) at the beginning of November."

In London, the May contract for North Sea Brent oil fell $1.17 to $25.21/bbl on the International Petroleum Exchange. Brokers said prices are likely to stabilize around $25/bbl in that market. The May natural gas contract lost 8.8¢ to the equivalent of $2.57/Mcf on IPE.

The average price for the Organization of Petroleum Exporting Countries' basket of seven benchmark crudes dropped $1.04 to $25.76/bbl. With oil prices already near the mid-point of OPEC's targeted $22-28/bbl price range, some analysts doubt that members of the cartel will be as willing to increase production to offset losses from Iraq and Nigeria.

Contact Sam Fletcher at samf@ogjonline.com