Oil Boom Profits

The International Energy Agency's monthly report for January raised this year's oil demand forecasts.

On the supply side, the report indicates that OPEC (minus Angola) produced less in January from one month earlier. However, these production cuts were offset by higher output from the former Soviet Union. In fact, the world oil supply has increased by 175,000 barrels per day in January to a new total of 85.5 million barrels per day. Lastly, because of the new shift of Angolan production into OPEC's numbers, there was large downward revision to non-OPEC production for 2007.

Primarily on the upward revision to demand forecasts we view the latest report as modestly supportive for oil prices. The downward revision to '07 non-OPEC supply is also supportive. Though OPEC continues to make strides in cutting production, the main challenge ahead for the producer group is how to quickly integrate Angola which will be brought into OPEC's quota system in the second quarter of this year.

Working gas in storage was 1,865 Bcf as of Friday, February 16, 2007, according to EIA estimates. This represents a net decline of 223 Bcf from the previous week. Stocks were 296 Bcf less than last year at this time and 182 Bcf above the 5-year average of 1,683 Bcf. In the East Region, stocks were 87 Bcf above the 5-year average following net withdrawals of 151 Bcf. Stocks in the Producing Region were 84 Bcf above the 5-year average of 532 Bcf after a net withdrawal of 60 Bcf. Stocks in the West Region were 12 Bcf above the 5-year average after a net drawdown of 12 Bcf. At 1,865 Bcf, total working gas is within the 5-year historical range.

Oil prices fell Tuesday following forecasts of warmer weather in the United States.

The northeastern part of the country, which accounts for 80 percent of the nation's heating oil demand, should have above-normal temperatures through early March, the National Oceanic and Atmospheric Administration said.

"The market's melting down has a lot to do with the snow melting," said Phil Flynn, an analyst at Alaron Trading Corp. in Chicago.

The March contract for light, sweet crude, which was to expire later Tuesday, fell 79 cents to US$57.74 a barrel in electronic trading on the New York Mercantile Exchange by midafternoon in Europe. On London's ICE futures exchange, April Brent crude oil futures fell 94 cents to US$57.20 a barrel.

Heating oil futures fell more than 3 cents to US$1.6205 a gallon on the Nymex, while natural gas prices dropped more than 22 cents to US$7.294 per 1,000 cubic feet.

Traders were also watching for news after a weekend fire that caused the shutdown of a U.S. refinery, and the kidnapping of three Eastern European oil workers in Nigeria.

Valero Energy Corp. was uncertain when production would resume at its 158,000-barrel-a-day McKee refinery in Sunray, Texas, which was shut down due to a weekend fire, spokeswoman Mary Rose Brown said Monday.

Working gas in storage was 2,088 Bcf as of Friday, February 9, 2007, according to EIA estimates. This represents a net decline of 259 Bcf from the previous week. Stocks were 193 Bcf less than last year at this time and 268 Bcf above the 5-year average of 1,820 Bcf. In the East Region, stocks were 151 Bcf above the 5-year average following net withdrawals of 179 Bcf. Stocks in the Producing Region were 109 Bcf above the 5-year average of 567 Bcf after a net withdrawal of 68 Bcf. Stocks in the West Region were 8 Bcf above the 5-year average after a net drawdown of 12 Bcf. At 2,088 Bcf, total working gas is within the 5-year historical range.

Oil prices fell Wednesday after the government's inventory report showed a surprise drop in gasoline and crude supplies but a less-than-expected draw in distillates used to make heating oil.

U.S. light crude for March delivery dropped $1.16 to $57.90 a barrel on the New York Mercantile Exchange. Oil rose immediately following the report before falling to current trading levels.

In its weekly inventory report, the Energy Information Administration said distillates, used to make heating oil and diesel fuel, declined by 3 million barrels last week. Analysts were looking for a decline of 4.2 million barrels, according to Reuters.

But crude stocks posted a surprise decline, falling by 600,000 barrels, while gasoline supplies declined by 2 million barrels.

Analysts were looking for a gain of 1.2 million barrels in crude stocks and a 1.9 million barrel addition to gasoline supplies.

Oil prices started out the year with a steep selloff, briefly falling below $50 a barrel as a mild winter swelled heating oil supplies and doubts lingered about OPEC's ability to cut production. The drop below $50 was 36 percent below oil's all-time non inflation adjusted trading high of $78.40 reached last July.

Oil prices fell back from the $60-a-barrel mark Monday as the market anticipated a supply surplus in the second quarter and following a suggestion that OPEC is unlikely to further cut production.

On Friday, prices climbed briefly above the psychological $60 barrier on unrelenting cold U.S. weather.

But light, sweet crude for March delivery was down 84 cents to $59.05 a barrel in electronic trading on the New York Mercantile Exchange by afternoon in Europe. Brent crude for March dropped $1.13 to $57.88 a barrel at London's ICE Futures exchange.

Hasan Qabazard, head of research for the Organization of Petroleum Exporting Countries, on Monday forecast a global surplus of crude supply over demand of some 300,000 barrels a day in the April-June quarter. The International Energy Agency has predicted a 2 percent drop in world oil consumption in the second quarter.

In an interview with The Wall Street Journal in Riyadh this weekend, Saudi oil minister Ali Naimi suggested that the cartel was not looking to make further production cuts.

The world oil market is in “much, much better health and balance,” and Saudi Arabia's production is currently 8.5 million-8.6 million barrels a day, about 1 million barrels a day lower than six months ago, he said.

“If you are asking me are we going to take additional cuts or increase supply, I do not know,” said Naimi, the oil cartel's de facto leader. “But, most probably if the trend is like what it is like today, with the market getting in much, much better health and balance, there may not be any reason to change.”

Working gas in storage was 2,347 Bcf as of Friday, February 2, 2007, according to EIA estimates. This represents a net decline of 224 Bcf from the previous week. Stocks were 26 Bcf less than last year at this time and 378 Bcf above the 5-year average of 1,969 Bcf. In the East Region, stocks were 238 Bcf above the 5-year average following net withdrawals of 139 Bcf. Stocks in the Producing Region were 137 Bcf above the 5-year average of 607 Bcf after a net withdrawal of 63 Bcf. Stocks in the West Region were 3 Bcf above the 5-year average after a net drawdown of 22 Bcf. At 2,347 Bcf, total working gas is within the 5-year historical range.

Outgoing BP chief John Browne may have sought to ease his successor's transition by slashing production growth projections for the next several years, analysts said Tuesday.

The news that production would be flat — a reversal from 4 percent annual growth targets — came as the company announced a 22 percent drop in its fourth-quarter profit amid lower oil and natural gas prices and increased spending to improve safety.

BP also announced a 1.3 percent drop in year-end 2006 profit despite record-high oil prices that surpassed $77 a barrel last summer.

"Overall, '07 will be a year to get back on track," Browne said Tuesday.

John Parry, an analyst with John S. Herold, called the lower production projection "a dose of reality" for the market six months before BP exploration and production head Tony Hayward succeeds Browne as CEO.

"I think they didn't want to have him climb too steep a ladder to please the investment community," Parry said. "They decided to set Tony Hayward up with less of an obstacle course to achieve."

Hayward called 2006 "a disappointing year" with production that fell 5 percent to 3.8 million barrels of oil equivalent per day.

An oil spill prompted the temporary shutdown of half the production at the Prudhoe Bay, Alaska, oil field BP operates. North Sea operations underperformed. And the company faces continued delays in getting two key Gulf of Mexico oil platforms on line.

Oil gave up early gains on Tuesday, steadying near $59 a barrel, as a cold snap in top consumer the United States failed to ignite the heating oil market and a $1 rally ran out of steam.

The onset of cold weather in the U.S. Northeast, the world's biggest heating oil market, and a shift in investment flows has lifted oil from a 20-month low of $49.90 on Jan. 18 and brought it into the danger zone for consumer nations' economies.

U.S. crude oil was up 16 cents at $58.90 a barrel by 1641 GMT, having earlier touched a one-month high of $59.99. London Brent crude was up 22 cents to $58.32.

"The market is looking for leadership in winter fuels and when heating oil didn't scream, but instead slipped from its early high and natural gas dropped, the run toward $60 could not be sustained," said Andrew Lebow, a broker at Man Financial.

Natural gas and crude oil prices edged up Monday on expectations of colder weather in major U.S. markets.

Light, sweet crude for March delivery rose 10 cents to $59.10 a barrel in early afternoon trading on the New York Mercantile Exchange. Brent crude for March delivery on the ICE Futures exchange inched up 2 cents to $58.43 a barrel.

Natural gas futures gained nearly 17 cents to $7.644 per 1,000 cubic feet.

"The weather is what's the most urgent, short-term issue here," said Tim Evans, an energy analyst at Citigroup Global Markets. "Over the weekend, the weather forecast became a lot colder for the six to 10 day period as well as the 11 to 15 day period."

Colder-than-normal temperatures blanketed the Northeast and Midwest on Monday and were expected to linger through Feb. 18, according to the National Weather Service. On Monday, temperatures registered in the single-digits and teens from Maryland to Maine, while many states in the Midwest were experiencing below zero temperatures with dangerous wind chills.

Working gas in storage was 2,571 Bcf as of Friday, January 26, 2007, according to EIA estimates. This represents a net decline of 186 Bcf from the previous week. Stocks were 152 Bcf higher than last year at this time and 454 Bcf above the 5-year average of 2,117 Bcf. In the East Region, stocks were 283 Bcf above the 5-year average following net withdrawals of 120 Bcf. Stocks in the Producing Region were 165 Bcf above the 5-year average of 642 Bcf after a net withdrawal of 45 Bcf. Stocks in the West Region were 6 Bcf above the 5-year average after a net drawdown of 21 Bcf. At 2,571 Bcf, total working gas is above the 5-year historical range.