reuters.com Wed February 5, 2003 03:40 PM ET

NEW YORK (Reuters) - U.S. heating oil stocks shrank 11 percent last week, as frigid temperatures stoked demand and distributors stocked up ahead of looming war in Iraq, government figures showed Wednesday.

Distillate stocks, including diesel fuel and heating oil, held by oil companies dropped 10.3 million barrels to 112.1 million barrels in the week to last Friday, the Energy Information Administration said in its Weekly Petroleum Status Report.

Primary heating oil stocks alone dropped 5.4 million barrels to 42.5 million barrels, partly the result of a long cold snap in the high-consumption Northeast region. The figures exclude secondary inventories held by retailers or distributors,

"That's far above what was expected from weather," said Jim Ritterbusch, president of Ritterbusch and Associates in Illinois. "Distributors are stocking up in advance of a war."

Distillate fuel demand last week averaged 4.9 million barrels per day (bpd), the highest weekly average ever, and was up 10.5 percent from a year ago over the last four weeks, the EIA said. Distillate stocks have fallen 17.1 million barrels, or 13 percent, in the last two weeks.

Oil prices jumped after the report, with New York crude futures rising 35 cents to $33.93 a barrel. Heating oil futures hit $1 a gallon for the first time since Dec. 2000.

Stocks were further depleted by further cutbacks in production by refiners, whose profit margins have been slashed by high crude oil costs as a two-month oil strike in Venezuela has pushed oil prices to two-year highs.

Refineries were operating at 85.8 percent of capacity last week, down from 87.2 percent the previous week, the EIA said.

Gasoline stocks dropped 3.4 million barrels to 209.6 million barrels as refineries slowed operations. Stocks are now more than 5 percent below last year.

Refineries in Venezuela, normally a big gasoline supplier to the United States, are still operating well below capacity because of the strike, raising fears of a shortfall in gasoline supplies ahead of the summer vacation driving season.

Reformulated gasoline stocks alone fell 4.2 million barrels to 35.4 million barrels, down 23 percent from last year.

Total fuel demand over the last four-week period averaged 20.1 million bpd, or about 4.9 percent more than the same period last year, the EIA said. Over the last four weeks, motor gasoline demand was up 5.0 percent, and residual fuel demand up 15.7 percent compared with the same period last year.

"Refiners weren't producing because of lousy margins and the consumers were consuming," said Mike Fitzpatrick, analyst with Fimat USA.

Crude oil stocks edged up 1 million barrels to 274.3 million barrels, the EIA said, continuing to hold just above 26-year lows.

The draw on product stocks has sharply increased the premium for heating oil and gasoline over crude oil -- the "crack spread." This has already begun to improve refiners' profit margins and should encourage them to refine more crude in coming weeks.

Gross refining margins more than doubled to $5.75 for each barrel of crude oil distilled last week, according to Salomon Smith Barney.

"The main impact will be to expand the heat cracks further," said Ritterbusch.

The American Petroleum Institute, an industry group, reported that distillate stocks fell 8.7 million barrels, and gasoline stocks dropped 3 million barrels. API said crude stocks dropped 79,000 barrels.

abcnews.go.com The Associated Press NEW YORK Feb. 5 —

The retail price of gasoline is up 8 percent since the start of the year, fueled by high oil costs and traders' self-fulfilling fears of an upward trend as the U.S. considers military action in Iraq.

"Traders are afraid that the next barrel they buy will be more expensive than the one they bought today," said Tom Kloza, director of the Oil Price Information Service, a Lakewood, N.J., publisher of industry data. That fear is contributing to the aggressive buying, he said.

The wholesale price of gasoline on the New York Mercantile Exchange rose 1.7 cent to $1.018 per gallon Wednesday afternoon, its highest level since May 2001. At the pump, the average price of regular unleaded gasoline is $1.53 per gallon, up 11 cents since the year began and 43 cents higher than a year ago.

Analysts said the main drivers on wholesale markets Wednesday were the latest government supply data and the case made against Iraq by Secretary of State Colin Powell.

Prices rose sharply early in the day after weekly Energy Department statistics showed thinning U.S. inventories of gasoline and distillates, which include diesel and heating oil.

Later in the day, prices retreated somewhat as traders determined that Powell's presentation had done little to sway key members of the U.N. Security Council that immediate military action in Iraq was needed. Representatives of China, Russia and France said the U.N. weapons inspectors' work should continue.

Aside from the threat of war in Iraq, the lengthy political and economic crises in Venezuela have also propped up world oil prices for months. The price of crude has been above $30 a barrel since mid-December and traded at $33.68 on Nymex Wednesday afternoon.

Venezuelan exports of crude oil and refined products have increased in recent weeks, but not enough to calm U.S. energy markets, analysts said.

Nationwide supplies of gasoline dwindled by 3.4 million barrels to 209.6 million barrels, or 5 percent below year-ago levels, according to the Energy Information Administration, the Energy Department's statistical arm. That slight shortfall does not fully explain why retail gasoline prices are 40 percent higher than last year, analysts said.

"We've got a market here being driven by psychological influences," said Peter Beutel of Cameron Hanover in New Canaan, Conn.

On the other hand, Beutel said the rise in heating oil prices is deservedly in response to diminishing supplies after several cold weeks of winter on the East Coast, where most of it is consumed.

Distillate supplies declined by 10.3 million barrels to 112.1 million barrels, or about 19 percent below last year's level, the EIA reported. The wholesale price of heating oil rose 1.6 cent Wednesday to 97.80 cents per gallon up 82 percent from last year.

Analysts said some refiners have reduced output in recent weeks in preparation for the shift from winter- to summer-grade fuel. The annual switch to cleaner-burning gas before the busy driving season requires shutting down equipment, scrubbing it clean and starting all over again a process that causes supplies to contract and prices to move higher even under the best conditions.

This year, the impact of these so-called turnarounds is being magnified by the possibility of a U.S.-led invasion of Iraq, analysts said.

"We're probably going to start the summer driving season at higher levels than we have in a long time," said Phil Flynn, an analyst at Alaron Trading in Chicago. "There's a lot of bad news in those inventory reports."

The biggest wild card is still the Iraq situation, Flynn said. "The general consensus is the sooner we get rid of Saddam Hussein, the sooner oil prices will come down."

abcnews.go.com The Associated Press NEW YORK Feb. 5 —

The retail price of gasoline is up 8 percent since the start of the year, fueled by high oil costs and traders' self-fulfilling fears of an upward trend as the U.S. considers military action in Iraq.

"Traders are afraid that the next barrel they buy will be more expensive than the one they bought today," said Tom Kloza, director of the Oil Price Information Service, a Lakewood, N.J., publisher of industry data. That fear is contributing to the aggressive buying, he said.

The wholesale price of gasoline on the New York Mercantile Exchange rose 1.7 cent to $1.018 per gallon Wednesday afternoon, its highest level since May 2001. At the pump, the average price of regular unleaded gasoline is $1.53 per gallon, up 11 cents since the year began and 43 cents higher than a year ago.

Analysts said the main drivers on wholesale markets Wednesday were the latest government supply data and the case made against Iraq by Secretary of State Colin Powell.

Prices rose sharply early in the day after weekly Energy Department statistics showed thinning U.S. inventories of gasoline and distillates, which include diesel and heating oil.

Later in the day, prices retreated somewhat as traders determined that Powell's presentation had done little to sway key members of the U.N. Security Council that immediate military action in Iraq was needed. Representatives of China, Russia and France said the U.N. weapons inspectors' work should continue.

Aside from the threat of war in Iraq, the lengthy political and economic crises in Venezuela have also propped up world oil prices for months. The price of crude has been above $30 a barrel since mid-December and traded at $33.68 on Nymex Wednesday afternoon.

Venezuelan exports of crude oil and refined products have increased in recent weeks, but not enough to calm U.S. energy markets, analysts said.

Nationwide supplies of gasoline dwindled by 3.4 million barrels to 209.6 million barrels, or 5 percent below year-ago levels, according to the Energy Information Administration, the Energy Department's statistical arm. That slight shortfall does not fully explain why retail gasoline prices are 40 percent higher than last year, analysts said.

"We've got a market here being driven by psychological influences," said Peter Beutel of Cameron Hanover in New Canaan, Conn.

On the other hand, Beutel said the rise in heating oil prices is deservedly in response to diminishing supplies after several cold weeks of winter on the East Coast, where most of it is consumed.

Distillate supplies declined by 10.3 million barrels to 112.1 million barrels, or about 19 percent below last year's level, the EIA reported. The wholesale price of heating oil rose 1.6 cent Wednesday to 97.80 cents per gallon up 82 percent from last year.

Analysts said some refiners have reduced output in recent weeks in preparation for the shift from winter- to summer-grade fuel. The annual switch to cleaner-burning gas before the busy driving season requires shutting down equipment, scrubbing it clean and starting all over again a process that causes supplies to contract and prices to move higher even under the best conditions.

This year, the impact of these so-called turnarounds is being magnified by the possibility of a U.S.-led invasion of Iraq, analysts said.

"We're probably going to start the summer driving season at higher levels than we have in a long time," said Phil Flynn, an analyst at Alaron Trading in Chicago. "There's a lot of bad news in those inventory reports."

The biggest wild card is still the Iraq situation, Flynn said. "The general consensus is the sooner we get rid of Saddam Hussein, the sooner oil prices will come down."

ogj.pennnet.com Sam Fletcher OGJ Senior Writer

HOUSTON, Feb. 5 -- Oil futures prices rebounded Tuesday in anticipation that US. Secretary of State Colin Powell would present convincing evidence Wednesday to members of the United Nations that Iraq has stockpiled weapons of mass destruction. That should help US officials overcome domestic and international opposition to military action against Iraq, traders said.

Meanwhile, the US Department of Energy reported early Wednesday that US commercial oil inventories increased by 1 million bbl to 274.3 million bbl last week, while total US distillate stocks plummeted by 10.3 million bbl to 112.1 million bbl. US inventories of gasoline fell by 3.4 million bbl to 209.6 million bbl.

But of top concern is that total US commercial inventories of crude and petroleum products are showing a rapid decline, noted Paul Horsnell, head of energy research for JP Morgan Chase & Co. in London.

Total US commercial inventories of crude and petroleum products fell by 15.5 million bbl in just 1 week to 65 million bbl below the 5-year average, down 98.7 million bbl from year-ago levels.

"Implosion" possible "The US oil products system is on the verge of an implosion, and it will take quite some time to get things back to normal," Horsnell warned. "The pressure is almost entirely on oil products, which have gone from 5 million bbl below normal 3 weeks ago to now stand 30 million bbl below normal. It's not just the scale of the gap that is of concern, but the rapid momentum it has shown in opening up."

He said, "Distillates are under particular stress. Heating oil inventories are now lower than their usual end-of-season level, and normally they should continue falling until the end of March."

Based on DOE numbers, Horsnell said, "Implied oil demand for the (past) week was a massive 20.819 million b/d. Distillate demand ran at 4.926 million b/d in the week, the highest ever recorded."

In order to respond to that market demand, he said, "Production is going to have to swing back towards distillates, threatening to frustrate the necessary seasonal rise in gasoline inventories. The threat is then of a return to the cycle of dislocations in heating oil and gasoline that characterized the market from 1999 to 2001. All this from a base where futures prices for gasoline and heating oil are already above $40/bbl."

Meanwhile, Horsnell sees the possibility for more disruption of world oil supplies even as the US moves closer to a potential war with Iraq.

"The nightmare scenario is one where Venezuela's slow production ramp up is not complete, where there is a war in Iraq, and where something else goes wrong," he said. "Nigeria is high on the list of potential candidates for the position of 'something else.' (Tuesday's) rioting in the key oil city of Warri does not augur well for the future."

Futures prices The March contract for benchmark US light, sweet crudes gained 82¢ to $33.58/bbl Tuesday on the New York Mercantile Exchange. The April position advanced by 75¢ to $32.91/bbl. Unleaded gasoline and heating oil for March delivery jumped by 4.38¢ each to $1.0006/gal for gasoline and 96.19¢/gal for heating oil.

However, the March natural gas contract dipped by 0.4¢ to $5.76/Mcf, after posting a contract high of $5.88/Mcf during trade Tuesday on NYMEX.

The market "rose early in very volatile trading as it followed (the) cash (market) higher but dipped suddenly just before noon on limited profit-taking," reported analysts at Enerfax Daily. "It traded near 2-year highs, supported by a soaring cash market and near-term cold weather as the bullish tone of the market remains in place. Without any precipitous sell-down recently, it reinforces the bulls thinking they can continue to buy high-end numbers."

Gas demand grows Enerfax analysts anticipate "some more profit-taking in the natural gas market," ahead of an anticipated report Thursday by the US Energy Information Administration of another large withdrawal of gas from US underground storage in response to low temperatures last week.

"Inventories are getting relatively low as the sustained cold weather is diminishing storage. Some utilities are worried they may not have enough gas and are adding on spot supply," they said.

Robert Morris with Salomon Smith Barney Inc., New York, reported Wednesday that, "Composite spot natural gas prices surged to their highest level in almost 2 years in January as some of the coldest weather since 2000 enveloped much of the country."

Consequently, the November through January period was nearly 5% colder than normal, he said.

As a result, if weighted heating degree days for the rest of February and March "just match the 10-year average," he said, "then the full (2002-03) winter will end up being just over 3% colder than normal."

Morris said, "Thus, it would appear at this juncture that, if anything, our official $4.10/MMbtu composite spot natural gas price forecast for the full year could prove conservative."

That's "particularly true," he said, if the average price of oil fails to drop to around $20/bbl in the second half of 2003 to encourage a switch from natural gas to residual oil for fuel. At this point, he said, only 2 bcfd of natural gas demand has been lost to fuel switching, out of a potential 4 bcfd.

On the other hand, Horsnell claimed, "With natural gas prices looking ominously strong, the possibility remains that fuel substitution could help prop distillate demand up further, even as the cold weather effect falls way."

He said, "In total, the supply side is struggling, the US refinery system is under severe stress, and demand is posting some impressive numbers. If you happen to be a US oil refiner with the luck of having spare crude to run and a refinery that is not in maintenance, then you are probably grinning from ear to ear. Oil product prices are moving up very rapidly relative to crude oil."

London market In London, the March contract for North Sea Brent oil jumped by 84¢ to $31.09/bbl Tuesday on the International Petroleum Exchange. The March natural gas contract inched up 2.02¢ to the equivalent of $2.80/Mcf on IPE.

The average price for the Organization of Petroleum Exporting Countries' basket of seven benchmark crudes lost 31¢ to $29.98/bbl Tuesday.

Contact Sam Fletcher at samf@ogjonline.com

www.financialexpress.com    Recent assurances regarding the country’s energy security in the event of a war in West Asia notwithstanding, the government seems to have finally come to terms with the need to create a strategic petroleum reserve (SPR). This is not only to tide over a potential supply crisis, but also the resultant impact on international crude prices. Since the majority of the country’s 70 per cent crude imports are located in that region, the decision was no doubt spurred by unpleasant memories of a possible recurrence of the economic distress experienced during the 1990-91 Gulf crisis. Although supplies from Iraq are currently at an all-time low and can be replaced at short notice by other producers, particularly Saudi Arabia, should the war prolong and spread to other countries in the region, it would develop into a real supply crisis. Not even Riyadh would be able to swing more than two million barrels a day (mbd) of excess production. Moreover, the impact of a supply disruption on prices would be prohibitive. Neither would the policy of supply diversification, being actively mooted by energy strategists, serve as an alternative. The recent crisis in Venezuela, which saw almost three mbd of crude being removed from the market, is a case in point. Under these circumstances, the decision to maintain a 15 million tonne SPR covering 45 days of consumption, revised from an earlier proposal of maintaining stocks of five million tonnes covering 15 days only, is welcome.

However, before a policy announcement to that effect can be made, the issue of who will pay for the SPR will have to be sorted out. While storage facilities are expected to cost Rs 4,350 crore, inventory costs would be around Rs 1,800 crore. The government has commissioned a study on the most feasible and cost-effective options, based loosely on the SPR models in the US, Japan and Germany. Either the capital cost of the storage facilities be borne by a one-time grant by the government, while inventories, or carrying costs, be funded by a cess imposed on crude through the Oil Industry Development Board. Alternatively, the entire cost, both capital as well as inventory costs, be borne by a special cess imposed on petroleum products. The second option — and the one which the government seems to be more inclined towards — would see the consumer being burdened with an additional cess of 50 paise per litre of petrol and diesel or a slightly lower cess being imposed on all petroleum products. Despite the evident disadvantages of the second option, the fact remains that security concerns must transcend price concerns. That, after all, are what strategic stocks are about.