U.S. heating oil stocks are now 31 percent below last year

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Oil Drifts Below $33 Thursday November 16, 7:10 AM EST LONDON (Reuters) - Oil prices slipped below $33 a barrel on Thursday but many traders expect the recent rally to resume as fears resurface of winter cold and shortages in the United States. "The cold start to this winter...has left traders fearful over what would happen if the current cold snap turns into a protracted period of cold weather," said Lawrence Eagles of GNI research in a report.

Brent crude was down 24 cents at $32.93 a barrel but low heating oil stocks in the United States and worries over Iraqi exports underpinned the market.

Data from the U.S. Department of Energy (DOE) on Wednesday showed a fall of 500,000 barrels in weekly U.S. heating oil stocks to 47.8 million barrels.

The data confirmed an earlier report released by the American Petroleum Institute (API) on Tuesday which showed heating oil stocks down 665,000 barrels.

U.S. heating oil stocks are now 31 percent below last year heading into the peak winter demand season.

The low stocks in the world's largest energy consumer were keeping the market on edge, although analysts and traders said overall crude supplies were ample.

Low heating oil stocks offer only the thinnest of buffers against the impact of a drop in U.S. temperatures.

"After three consecutive mild winters the impact of low temperatures is amplified," said Eagles.

"(A price spike is) very likely because everybody has very low stocks," said Morgan Stanley Dean Witter's regional energy analyst, You Jing-feng.

"That means the demand for inventory will be extremely high when demand increases."

Prices could hit $40 by the end of the year if a sustained cold spell hits the United States or stocks drop much further, You said.

U.S. Energy Secretary Bill Richardson on Wednesday voiced concern about low energy stocks and said the option of releasing more oil from the U.S. Strategic Petroleum Reserve (SPR) was still on the table.

The U.S. initiated a 30 million barrel strategic oil swap in October, but failed to bring prices down to the Clinton administration's preferred $20-$25 level.

Fresh concern over Iraqi exports also underpinned the markets.

Iraq has asked lifters to pay a 50-cent premium over the official selling price for its crude into an account outside United Nations' control by December 1, or forfeit the right to new contracts. Baghdad has also doubled port charges for tankers loading at Mina al Bakr in the Gulf.

Most traders said they were unable to comply with the 50 cents price hike as it would mean circumventing U.N. sanctions that require all payments for Iraqi crudes to go into an escrow account under the U.N. oil-for-food program.

Encouraged by Islamic support, U.S. distraction and high world oil prices, Iraq is growing increasingly bold in its efforts to break a decade-old stranglehold of U.N. economic sanctions.

But Western diplomats and experts say that despite recent symbolic political gains, the core sanctions that deny President Saddam Hussein control over Iraqi oil revenues and bar foreign investment to develop his oilfields remain firmly in place.

Oil cartel OPEC had also given the market little cause to retreat, ratifying an agreement on Monday to keep output unchanged rather than raise them for the fifth time this year.

Officials from top oil producers and consumer nations will hold a key meeting in Riyadh, Saudi Arabia, later this week, where Richardson said he hoped "dialogue may help the stability of the oil market."

http://money.iwon.com/jsp/nw/nwdt_rt_top.jsp?cat=TOPBIZ&src=202§ion=news&news_id=reu-37152&date=20001116&alias=/alias/money/cm/nw

-- Martin Thompson (mthom1927@aol.com), November 16, 2000

Answers

Shivering In Anticipation of Oil Increases

by Rick Olivere, CFA

4:00:00 PM November 15, 2000 GMT

The American Petroleum Institute (API) and the Energy Information Agency (EIA) released data Wednesday for the week ending Nov. 10 showing that crude oil inventories made an expected move upward. The API showed an increase of 2.5m barrels (bls), while the EIA's data reported a climb of 1.5m bls. However, adjusted for the increase in the area west of the Rocky Mountains (PADD V), the API reported a decline of crude oil inventories in the rest of the US. After a 665,000 bls decrease, heating oil inventories on a national basis are now 31.3% below a year ago, compared with 34% a week ago.

Despite four oil production increases totaling 3.7m bls, no material build in national crude oil or heating inventories has occurred yet. We believe investors’ fears of a significant decline in the price of oil to the mid-$20s are increasingly less likely to be realized. We continue to be drawn to the disconnect between the current prices of oil ($35) and natural gas ($6.26) and the market prices of the shares of producers of oil and natural gas.

Our Buy recommendations and target prices of energy and energy service stocks are included in our recent review of the weekly rig surveys.

The American Gas Association released data Wednesday that showed inventories of natural gas declined 6bn cubic feet (bcf) to 2.7 trillion cubic feet (tcf) and are now 9% below a year ago. With 55m, or about 55%, homes in the US heated by natural gas, an extended period of cold weather is likely to have an exaggerated effect on natural gas prices, now over $6 per million cubic feet (mcf).

We particularly throw a spotlight on the companies on our Buy list whose operations are oriented toward exploration and production of or drilling for natural gas. These include BP [BP: NYSE], Burlington Resources [BR: NYSE ], Occidental Petroleum [OXY: NYSE], Baker Hughes [BHI: NYSE], Nabors [NBR: ASE], and Grey Wolf [GW: ASE].

The API statistics showed an increase of gasoline inventories after two weeks of declining supplies. We will continue to monitor this in coming weeks as declining or stable gasoline inventories, along with stable heating oil inventories, may hold oil prices up in the spring season, when prices decline seasonally. In this possible case, the seasonal decline in oil prices might be tempered if refiners bid for crude oil to build gasoline inventories for demand during the summer driving season.

Refinery utilization for the week to Nov. 10 fell to 93.1% from 93.8%. We continue to believe operation at effective full capacity points to the imbalance between robust demand for refined products such as heating oil and strained refinery capacity of about 16m b/d. This domestic capability has not increased -- in fact, it declined from 19m b/d because of operating losses in refining as well as environmental requirements.

We reiterate our suggestion that investors consider equities of refiners such as Amerada Hess [AHC: NYSE] and Valero [VLO: NYSE] . Both companies have revenue and earnings exposure to refining heating oil.

We believe the current level of OPEC production of 29.5m b/d (including Iraq) points to the vulnerability of the global economy to production disruptions or spikes in demand . This is in relation to winter weather since excess crude oil production capacity is less than 2m b/d and it resides in two countries: Saudi Arabia and the United Arab Emirates (UAE).

Our conclusion continues to be that the imbalance between demand and supply is likely to become clearer in coming weeks as winter weather arrives. This is an additional reason to bolster our thesis that sustained higher cash flows from production of oil and natural gas are likely to drive a multi-year cycle of drilling activity.

http://www.ideaadvisor.com/article/article.asp?aid=6784

-- Martin Thompson (mthom1927@aol.com), November 16, 2000.


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