The front-month crude contract climbed above $91/bbl in early trading Jan. 25 on the New York market. "Markets continued to rally behind federal actions, and energy was no different," said analysts in the Houston office of Raymond James & Associates Inc. In addition to the proposed economic stimulus program, earlier this week the Federal Reserve reduced its overnight lending rate by three quarters of a percentage point to 3.5%.

Raymond James analysts said, "The market continues to signal that the demand side of the energy picture is the most critical component for energy valuations, as evidenced by [Jan. 24]"s oil-driven rally. Oil was up nearly $2.50/bbl despite the bearish inventory reports."

The Energy Information Administration reported US inventories of crude increased by 2.3 million bbl to 289.4 million bbl in the week ended Jan. 18. US gasoline stocks jumped by 5 million bbl to 220.3 million bbl during the same week. Distillate fuel inventories declined by 1.3 million bbl to 128.5 million bbl (OGJ Online, Jan. 24, 2007).

The latest EIA weekly data are dominated by seasonal patterns, said Paul Horsnell at Barclays Capital Inc., London. "Crude inventories did move up, but then again we expect that to happen for the next 4 months as a normal seasonal pattern," he said. "Cushing[, Okla., crude] inventories are now some 22 million bbl lower than the current storage limit; 1 year ago they were just about 4 million bbl lower than the then limit."

Horsnell reported, "Gasoline is showing the strongest year-over-year growth in demand for January-to-date and that has compensated for flat distillate demand and weak jet demand to keep the overall level of growth in positive territory. Gasoline demand is currently almost exactly at its seasonal low, and should increase seasonally from this point. In each of the past 6 years (using the most reliable final data), February has marked the start of a run of 6 months of consecutive gasoline demand increases, and we have no reason to expect 2008 to break that pattern."

Meanwhile, ConocoPhillips reportedly has reduced runs at its 275,000 b/d refinery in Wilhelmshaven, Germany, because of poor margins. There has been no confirmation by the company as to how much of its production will be curtailed. However, sources said regular maintenance has been scheduled for the first or second quarters. Tesoro Corp. earlier said it would reduce runs at its US refineries because of low margins.

In other news, Societe Generale in Paris said a rogue trader made unauthorized trades that cost the bank some $7.2 billion. That has led to speculation that Societe Generale"s liquidation of rogue long futures positions on stock market indices as a result of that loss may have caused much of the volatility that created a "Black Monday" among European markets at the start of this week.

Olivier Jakob of Petromatrix GMBH, Zug, Switzerland, said, "Currency markets were building some expectations that other central banks might follow in the footsteps of the Fed, but with the Societe Generale creating doubts as to what triggered the equity rout, the chance of a more coordinated action on interest rates has become more remote and the dollar index has been under pressure."

Still, Jakob said, "The support on oil is part of a more global support on commodities, and West Texas Intermediate should not be able to decouple from it. WTI has managed to hold the support of the previous correction."

Horsnell noted that, despite the market"s volatility over the past week, the March crude contract has fallen 16¢, while March North Sea Brent has risen 32¢. He said, "We still think that is the wrong way for the WTI to Brent spread to go." The front-month crude contract hit an intraday low of $86.11/bbl this week on the New York market, but that was roughly the bottom support level that "was being talked about in a business-as-usual case without any prior knowledge of the incidence or depth of the market turmoil," said Horsnell.

He said, "With demand growth for 2008 expected to be heavily centered on the Middle East, China, and India, government policy is likely to trump gross domestic product growth as the key short-term driver on the demand side."

PIN/OGJ.COM