IPE Brent futures up a dollar as bullish news goads funds buying

IPE Brent futures up a dollar as bullish news goads funds buying

London (Platts)--23May2006

IPE Brent futures in London rose sharply in morning trading on Tuesday
breaking through $70/barrel and up over $1 at one stage building on late
Monday gains.
Renewed buying activity was supported the recovery of gasoline prices,
expectations of a large draw US crude stocks this week and suggestions that
OPEC might cut output when the cartel meets in Caracas June 1.
"Crude has tested the $67.50/barrel levels two or three times recently
and hasn't broken through," said a London-based broker. "Funds have been
waiting to see if it will break this level and then buy at around $65/barrel,
flushing out some short positions, but it hadn't happened and the latest news
in the market is just the excuse needed to big up the price and instigate a
buy."
At 1131 London time (1031 GMT), the July IPE Brent futures contract was
changing hands at $70.35/barrel, having risen $1 from yesterday's settle at
$69.35/barrel.
"There hasn't been a convincing bounce in late trading for a few days
until last night," he added, when a surge of interest in the expired NYMEX
sweet cude futures for delivery in June helped support IPE Brent futures and
NYMEX WTI futures.
Since last Thursday, gasoline, which had been a driver in helping crude
futures reach record highs in early May, has recovered over 6 cents from
$1.94/gallon to $2.08/gallon prompting one broker to suggest that gasoline is
never comfortably remaining below the $2/gallon level. Meanwhile, prices also
received a boost late Monday from Valero Energy halting production of low
sulfur diesel at its St. Charles, Louisiana refinery after a fire on Saturday
damaged a 48,000 b/d distillate hydrotreater.
On Monday, Venezuelan Energy Minister Rafael Ramirez suggested that
current oversupply in global crude markets would normally warrant an output
cut among OPEC members.
"Market fundamentals indicate that there should be a cut in production,"
Ramirez said during a press conference in Caracas. "There is more than enough
oil in the market."
Monday also saw the release of the US National Oceanic and Atmospheric
Administration's most recent hurricane outlook calls for an above-average
storm season, although it is not likely to produce nearly as much activity as
last year's record season.
"The hurricane report was only confirming what we already know," said one
broker who mentioned the rising insurance costs being paid by oil companies
with interest in the Gulf of Mexico ahead of hurricane season.
Meanwhile, market players were anticipating a big drop in this week's US
commercial crude stocks inventory data to be released by the Energy
Information Administration and American Petroleum Institute. A report released
by Prudential Financial anticipates a 1-million barrell draw in crude stocks
and refinery runs to increase by 0.7%.
On a more bearish note, London-based Centre for Global Energy Studies
said soaring world oil prices may have peaked at last noting that demand
forecasts were being trimmed and builds in inventories were beginning to
offset spare production capacity concerns.
Indeed, CGES said in its Monthly Oil Report, "a fundamental change in
sentiment" as oil demand growth slows and both upstream and downstream
capacity rises should start to put downward pressure on oil prices in the
medium term.
Assuming that OPEC continues to produce around 30.1 million b/d for the
rest of this year and that oil demand grows at 1.17 million b/d, or 1.4%
annually, prices are likely to ease slightly over the next few months as
inventories rise to a further 2.5 days of forward cover, the CGES said.
Under this scenario, the CGES sees Dated Brent averaging around
$69.30/barrel in the second quarter, falling to $68.8/barrel in Q3 and
to $67/barrel Q4. By the beginning of 2007, the CGES said, dated
Brent could be back down around $64/barrel.
Prices could go even lower, said the CGES, offering that a drop in
incremental oil consumption to 800,000 b/d, just above 0.9%, could give some
reprieve from high oil prices alongside rising inventories and recovery of
spare production capacity levels.
Under this scenario, Dated Brent could be below $50/barrel by the end of
this year and into the high $30s/barrel by the first quarter 2007.
Jonathan Davies:jonathan_davies@platts.com

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