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Oil & Gas Journal

Sam Fletcher
Senior Writer

HOUSTON, July 2 -- Crude prices hit new record highs July 2 and continued climbing in after-hours electronic trading after the Department of Energy reported a larger-than-expected fall in crude inventories.

"Oil continued its bullish trajectory, with two data points helping to drive crude above the $144/bbl mark for the first time. News that the European Central Bank is set to raise its benchmark rate (confirmed this morning) sent US investors looking for a hedge against the weakening US dollar. In addition, DOE reported that crude inventories fell for the sixth time in the last 7 weeks," said analysts in the Houston office of Raymond James & Associates Inc.

The same government report showed that an increase in refining activity to 89.2% of capacity continued to build gasoline supplies as demand declined just prior the July 4 US Independence holiday, which usually is a peak demand period. The DOE's Energy Information Administration reported commercial US crude inventories fell 2 million bbl to 299.8 million bbl in the week ended June 27, the lowest level since January and exceeding the Wall Street consensus of a 400,000 bbl draw. Gasoline stocks escalated by 2.1 million bbl to 210.9 million bbl in the same week. Distillate fuel inventories grew by 1.3 million bbl to 120.7 million bbl (OGJ Online, July 2, 2008).

Refining margins are under pressure and are being sustained "only by heating oil" with the crack for the August contract for reformulated blend stock for oxygenate blending (RBOB) trading below $5/bbl, said Olivier Jakob at Petromatrix, Zug, Switzerland. "With processing margins low and even worse in the back months of 2008, refineries are not volunteering to build up crude stocks at $140/bbl while they have to plan for lower operating rates and are keeping instead to a minimum of crude inventory," he said.

Moreover, the higher heating oil crack is triggering a continued shift in the configuration of refinery yields. "US refinery runs were in June at par to last year but distillate production was 500,000 b/d higher, while gasoline production was 350,000 b/d lower. With the change of yields and the lack of gasoline demand, US refineries do not need to run higher levels of crude oil to produce the increased distillates going to the export market," said Jakob.

Meanwhile, he said, oil markets "have set themselves for another Trichet trade today." The front-month crude contract jumped by more than $5/bbl June 5 when Jean-Claude Trichet, president of the European Central Bank, said the bank might raise its interest rates (OGJ Online, June 5, 2008). Now, Jakob said, "The euro is back towards $1.59 and crude oil is higher in anticipation of Trichet providing an interest rate hike."

He said, "Fundamentally we have passed the point of oil demand destruction, so a further fall in the dollar engineered by the European Central Bank will do little to create additional demand that would warrant buying oil for that reason." A rate increase by the European bank would provide an "easy excuse to bid up oil again, but that factor may be "partly priced-in already," said Jakob.