PARIS (ResourceInvestor.com) -- It’s a crazy market. Last week we were looking forward to a week of normality. Then President Obasanjo of Nigeria called a meeting. That was all it took and we were off once again.
The 600,000 barrel per day shut-in from the Nigerian Delta is not helping the tight supply lines we are so used to. But as you have seen, the world has not collapsed as a result.
We were thinking we would see prices remain relatively stable but then the president decided to do something about the problem of ‘militants’ (damn those pesky locals). This caused the market to freak. When Nigerian presidents’ try to do something about something, it usually means people get killed.
Of course Obasanjo might instead want to do something about those ‘marginal fields’ recently taken from the international oil companies and awarded to ‘local outfits’. When we say ‘local outfits’ what we really mean is Obasanjo’s front companies and his cronies. But I doubt that.
So with just a wave of his highlighter pen Obasanjo made a worried market jump back up to $66 - on the back of some rather strange data.
Oil has now broken out of its previous technical constraint at around $65.60 and now could test the next line at $68.50. The desire by the market for light sweet crude is driving the price. As we said last week refiners are coming back online. They have seen gasoline stocks draw down at a time when they should be building; the drawdown of 5.4 million barrels this week was the biggest in two years.
So refiners are sucking up crude. Total inventories have fallen by 13.5 million barrels over the last three weeks. The Energy Information Agency (EIA) report that OPEC have failed to meet their target runs, on the back of those Nigerian, Iraqi, Iranian and Venezuelan problems, bombs and poor maintenance (the last two) respectively. OPEC 10 could only hit 27.855 million barrels per day, down 200,000 bpd year on year.
Meanwhile back in the place that matters, American gasoline demand is still hot. To be fair in January it was not as hot as was made out. Revised figures from the EIA actually showed a fall in January of 48,000 bpd. So much for all the importance the market puts on those weekly inventory figures, myself included.
But now it is really picking up. February’s gasoline demand was up 2.6% year on year, the strongest demand growth since April 2004. It is going to pull that light sweet WTI and Brent up by the nose. As a result the difference between Brent, in demand in Europe and the U.S., and WTI, mainly in demand in the U.S., has narrowed to 70 cents and less.
As we expected gasoline prices at the pump are kind of flat. $2.49 is the average American price, a slight fall on last week as those refiners get their act together again.
In China, the small price increases put forward by the Chinese government this week have been partially offset by some more subsidies for rural areas and the poor. This means that a similar pattern of enforced rationing (basically a policy of ‘not enough tough luck’) will occur once again.
Refiners in China do not want to sell their products to their own market because there is not enough money to be made. So after importing the crude in many cases they then export the gasoline to Asian countries that will pay. This means you get power cuts and pump queues in Guandong, but it does help suppress the price in the U.S. ‘Good old China’ will be the refrain of the American motorist this summer. Well, maybe.
So light sweet and gasoline are what is driving the market next week. Yes on the horizon we have amazing gas prices of 98 cents per therm for the start of 2007 - that is the equivalent of oil at $110 per barrel. But hey, after the refiners get in gear and imports to the U.S. – down 1.3 million barrels a day in March – get going again, we should see prices trend downwards in the second quarter.
But for now, next week, prices could push up and down between $65 and $69. Just pray President Obusanjo does not decide to actually do something at his eagerly anticipated meeting.
