26 May 2007 - 10:41
  • News Code: 105525

HOUSTON -- Benchmark US crude for July delivery dropped below $65/bbl to the lowest level in more than a week on May 24, while in the UK North Sea Brent for the same month broke through $71/bbl, a 9-month high, before settling at $70.72/bbl.

"As a consequence, the Brent-West Texas Intermediate spread widened to as much as $6.54/bbl," said analysts at Barclay"s Capital, the investment banking division of Barclays Bank PLC, London.


"The decline in the WTI crude oil contract continues to stem from refinery issues creating a localized glut at the Cushing Hub in Oklahoma," said analysts in the Houston office of Raymond James & Associates Inc. "We continue to believe the Brent crude contract more accurately depicts the tight global oil market, along with underlying supply risks associated with Nigeria and Iran, and would expect this premium over WTI to dissipate once the localized glut is eliminated. Of note, this Memorial Day weekend [May 26-28] marks the start of the driving season; and with gasoline over $3/gal at the pump, traders will surely be focused on the effect (if any) on demand."


Barclay"s analysts concurred that "continued supply disruptions in Nigeria and evidence of increasing tensions over Iran are showing a tendency to impact Brent values more than WTI, in spite of the absence of any fundamental rationale." Both the white-collar and blue-collar workers unions went on strike May 24 at the Nigerian National Petroleum Corp. in hopes of reversing the sale of government refineries in that country. Workers have treatened to target oil exports from Africa"s biggest producer. The state oil company holds the majority stake in joint ventures with international oil companies that accounts for more than 90% of the country"s oil exports.


Chinese demand

Meanwhile, Chinese trade data for crude oil and refined products released overnight indicated strengthening Chinese demand. Net crude oil imports hit an all-time high of 3.48 million b/d, beating the previous record of 3.25 million b/d set last September. "Net product imports were also very strong with net imports of main products (gasoline, jet kerosine, diesel, and residual fuel oil) totaling 415,000 b/d, the highest since September 2006," said Barclay"s analysts.


"Nevertheless, China"s own reported refinery throughput of crude oil and output of products was relatively subdued in April, partially offsetting the growth in imports with the result that apparent consumption of major products was up just 3%," Barclay"s analysts said. "This is weaker than the average rate of consumption achieved so far this year, with cumulative demand for main products in the year to April now running at 3.7%. The disparity between rapidly increasing crude oil import levels and the modest increases seen in local refinery output suggests some element of crude oil stock building or an under-reporting of refinery production levels."


Energy prices

The July contract for benchmark US light, sweet crudes bounced between $63.82-66.15/bbl May 24 before closing at $64.18/bbl, down by $1.59 for the day on the New York Mercantile Exchange. The August contract lost $1.39 to $65.63/bbl. On the US spot market, WTI at Cushing dropped $1.49 to $63.59/bbl. Heating oil for June delivery dipped by 0.32¢ to $1.93/gal on NYMEX. The June contract for reformulated blend stock for oxygenate blending (RBOB) escalated by 4.65¢ to $2.36/gal.


The June natural gas contract dropped 7.6¢ May 24 to $7.68/MMbtu on NYMEX. On the US spot market, however, gas at Henry Hub, La., gained 2¢ to $7.57/MMbtu. "Recent injection rates [of gas into US underground storage] have been larger than recent years, for sure, but the weekly progression remains limited, e.g., recent weeks hovering in the 90 [bcf], now broken [in the week ended May 18] with 104 bcf injected, a small surprise," said analysts at Barclay"s Capital. "However the relative position of inventory figures remains only slightly changed, maintaining a divergent appearance. For bulls, there is still…205 bcf less gas in the ground, compared to 2006. For bears, they can cite the second-highest late May inventory on record as reason enough that prices should fade from their current levels. However, with the new month of market dynamics, pressures on the demand side may make further weakness more difficult," analysts said.


In London, the July IPE contract for North Sea Brent crude inched up 12¢ to $70.72/bbl. Gas oil for June gained $6.75 to $613/tonne.


The average price for the Organization of Petroleum Exporting Countries" basket of 11 benchmark crudes increased by 56¢ to $66.74/bbl on May 24.



News Code 105525

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